MNI BRIEF: Larger Deficits Could Mean Higher Fed Rates-Schmid
MNI (WASHINGTON) - Kansas City Fed President Jeff Schmid on Wednesday repeated that even as the supply of government debt has jumped and is expected to continue growing at a very rapid rate it will not be inflationary because the central bank will achieve its 2% inflation objective.
"As I said in May, large fiscal deficits will not be inflationary because the Fed will do its job and achieve its inflation objective, though in doing so, the outcome could be persistently higher interest rates," Schmid said in prepared remarks. "This relationship is also at the crux of the rationale for the political independence of the central bank. Political authorities could very well prefer that deficits not lead to higher interest rates, but history has shown that following through on this impulse has often resulted in higher inflation."
An independent central bank insulated from immediate political pressure and guided by a clear inflation objective has historically been an effective means for achieving and maintaining low and stable inflation, Schmid added.
On the near-term monetary policy outlook, the Kansas City Fed leader said "now is the time to begin dialing back the restrictiveness of monetary policy," but "it remains to be seen how much further interest rates will decline or where they might eventually settle." (See: MNI INTERVIEW: Fed Could Pause As Prices Spike in 2025-Gagnon)