Fed's Schmid Says Current Policy Stance Only Slightly Restrictive

(RTTNews) - Kansas City Fed President and CEO Jeffrey Schmid, who supported the latest Federal Reserve rate cut, said on Thursday that the current policy stance was appropriate to strike a balance between maintaining price stability and as an insurance against any substantial weakening in the labor market in the coming months.

Last week, the Federal Reserve lowered the federal funds rate by 25 basis points to 4 percent, which was the first reduction this year.

"…setting policy appropriately is not just about where the economy is, but also, given lags in the effect of policy, about where the economy might be going," Schmid said in a speech to the Mid-Sized Bank Coalition of America in Dallas, Texas.

Schmid had supported the Fed's policy stance of leaving rates unchanged, throughout the year, due to the stickiness of inflation above the 2 percent target.

Citing recent data, the policymaker noted that there was a growing risk that the labor market may cool more substantially or abruptly than anticipated. Hence, the quarter-point reduction was a reasonable risk-management strategy, given the Fed's "heightened concern over the health of the labor market".

"My view is that inflation remains too high while the labor market, though cooling, still remains largely in balance," Schmid said. "I view the current stance of policy as only slightly restrictive, which I think is the right place to be."

He said he will continue to adopt a data-dependent approach to any further adjustments in the policy rate.

In a speech earlier this week, Fed Chair Jerome Powell said near-term risks to inflation are tilted to the upside and risks to employment to the downside, thus posing a "challenging situation." Powell added that two-sided risks meant there was no risk-free path for interest rates.

While markets are hoping for more interest rate cuts before the end of the year, there has been some pushback from some Fed policymakers as indicated in recent rhetoric.