MNI: Fed's Schmid Counsels Patience, Wants Small Balance Sheet

Kansas City Federal Reserve President Jeff Schmid said Friday he'd prefer the central bank remain patient and wait for clear and convincing evidence that inflation is on track to hit the 2% target before adjusting the stance of policy, also suggesting he prefers the Fed not slow down on QT anytime soon.

"Although inflation has stepped down significantly since the Fed began raising interest rates in 2022, it remains above the 2% definition of price stability," he said in prepared remarks. "Inflation has surprised to the upside since the beginning of the year and has run at roughly a 4% annual rate during the first quarter."

"This recent data underscores what I believe is the need for the Federal Reserve to be patient as we wait for clear and convincing evidence that inflation is on track to sustainably return to 2 percent," he (See MNI INTERVIEW: One Fed Cut Most Likely 2024 Outcome-Keister)

Schmid said he will be watching three factors to monitor progress towards the Fed's inflation goal, including the tightness of the labor market, potential for an increased supply of labor, and the risk of renewed supply chain challenges.

"Ultimately, achieving better balance in the labor market will likely be necessary for Federal Reserve policymakers to deliver on our price stability mandate and achieve 2% inflation," Schmid wrote. "While I welcome the significant growth witnessed in the economy’s workforce last year, it remains unclear whether this rapid pace of supply improvement will continue going forward."

ONGOING ECONOMIC RESILIENCE

Over the past two years, the FOMC has raised the federal funds rate by over 500 basis points and has started to unwind the large portfolio of security holdings it amassed on its balance sheet, Schmid noted. But still, the demand for goods and services has displayed remarkable resilience and the economy continues to grow at a pace well above its longer-run trend, he said.

"With inflation running above target, economic growth continuing to show momentum, and elevated prices across a range of asset markets, the current stance of monetary policy is appropriate," he told a commodity futures conference. "Therefore, rather than preemptively adjust the policy rate, I would prefer to be patient and wait for clear and convincing evidence that inflation is on track to hit our 2% target before adjusting the stance of policy."

Schmid also reiterated his preference for a much smaller balance sheet and added he would like to see a shorter average maturity.

"I believe our balance sheet should primarily be composed of Treasury securities to minimize the effect of the Fed’s holdings on the price and allocation of credit in the economy," he said, noting that liquidity remains abundant and the current pace of balance sheet reduction is not creating strains in funding markets.