Kansas City Fed’s Schmid says central bank has work to do on inflation

In his address to a credit union conference in Hawaii, Kansas City Federal Reserve President Jeff Schmid stated that the central bank possesses the resources and obligation to tackle inflation that is currently excessive. Speaking to a gathering, Schmid noted that inflation is uncomfortably high, exceeding the 2% benchmark while trending in the wrong direction. He refrained from advocating for additional rate increases.

Schmid challenged prevailing beliefs regarding inflation and the Federal Reserve's capacity to manage it. He contended that the notion of high inflation being solely the result of repeated supply shocks is flawed. Instead, he emphasized that inflation arises due to an imbalance between supply and demand, with demand playing a crucial role when disruptions to supply occur. This holds true in the context of an environment with robust demand.

Furthermore, Schmid disagreed with the idea that demand-driven inflation sources, such as the expansion of artificial intelligence, are resistant to the influence of the Federal Reserve's policies. He pointed out that the Federal Reserve had raised interest rates by a quarter percentage point to 3.75%-4.00% in September but did not raise them again at the most recent meeting.

Interest rate futures markets now anticipate a quarter-point increase at the upcoming December meeting, with a slim chance of a half-point hike, based on recent inflation readings that surpassed expectations and remarks from other Fed officials, including Governor Christopher Waller.

Schmid highlighted that both prevailing narratives—attributing inflation to either supply shocks or demand that is unrestrained by higher interest rates—share a common underlying assumption: that inflation is somehow beyond the Federal Reserve's control. However, he firmly disagreed with this perspective. In line with Chair Kevin Warsh's assertion, Schmid emphasized that there is work to be done by the Federal Reserve to achieve price stability.