MNI: Fed Needs Convincing Evidence Before Easing Policy-Schmid

Kansas City Fed President Jeff Schmid said Monday the central bank can be patient before easing monetary policy, while also staking out a position for a smaller Fed balance sheet and continued QT.

"With inflation running above target, labor markets tight, and demand showing considerable momentum, my own view is that there is no need to preemptively adjust the stance of policy," he said in his first public remarks on the economy since taking office in August of last year.

"Instead, I believe that the best course of action is to be patient, continue to watch how the economy responds to the policy tightening that has occurred, and wait for convincing evidence that the inflation fight has been won." (See: MNI INTERVIEW: FOMC In No Rush To Cut Rates - ExVC Kohn)

The new Kansas City Fed chief said the decline in inflation over the last year has been encouraging, but added the economy is not out of the inflationary wood just yet. "The drop in inflation has largely been driven by reductions in energy and goods price inflation as oil markets rebalanced and supply chains healed," he said.

Absent further help from goods and energy prices, further disinflation will need to come through services, he said, taking caution from the January CPI. "The prices of services—which comprise two-thirds of consumer spending—continue to rise briskly amid still tight labor markets and elevated wage growth."

SMALLER BALANCE SHEET

Addressing the Fed's large balance sheet, Schmid said he prefers minimizing the Fed’s presence in financial markets.

"To be clear, my position is that the balance sheet is an important monetary policy tool, especially in times of crisis. However, once a crisis has passed, it should be a priority for the Fed to reduce its balance sheet and to lessen its footprint in financial markets," he said in his remarks to the Economic Club of Oklahoma City.

While it is an open question as to how much further the Fed can shrink its balance sheet, Schmid said he is in no hurry to halt the ongoing reduction, although he added a return to any pre-crisis norm is not realistic.

"I don’t favor an overly cautious approach to balance sheet runoff for the sake of avoiding any volatility in interest rates," he said. "Instead, some interest-rate volatility should be tolerated as we continue to shrink our balance sheet."