MNI: Fed's Schmid Prefers Gradual Cuts, To Higher Neutral
MNI (WASHINGTON) - Kansas City Federal Reserve President Jeff Schmid said Monday he prefers the central bank scale back rate cuts to more modest adjustments so there is time to observe the economy’s reaction and to assess the neutral rate, which is likely "well above" what it was in the decade before the pandemic.
"My hope is for what I might call a more normalized cycle. A cycle where the Fed engages in modest adjustments to policy to keep the economy on an even keel of steady growth, stable prices, and full employment," he said according to prepared remarks. "Absent any major shocks, I am optimistic that we can achieve such a cycle, but I believe it will take a cautious and gradual approach to policy."
Schmid supports dialing back the restrictiveness of policy, but his preference "would be to avoid outsized moves, especially given uncertainty over the eventual destination of policy" and "to avoid contributing to financial market volatility." (See: MNI POLICY: Fed To Scale Back To 25BP As US Outlook Stays Rosy)
There has been "considerable progress" in returning inflation to the Fed’s 2% objective and the labor market is seeing a "normalization rather than a significant deterioration of conditions." Growth remains strong and the economy has shown continued momentum, with real GDP likely poised to grow around 3% in the third quarter, he said.
"There is ample evidence that the current stance of monetary policy, and the level of interest rates, is restrictive, but less evidence that it is very restrictive," Schmid said. "It is my belief that interest rates could settle well above the levels we saw in the decade before the pandemic."
Following a tremendous expansion during the pandemic, the Fed has been shrinking its balance sheet since the middle of 2022. "My preference is to shrink the balance sheet as much as possible while remaining consistent with the Fed’s current operating framework," Schmid said in a speech to financial analysts in Kansas City.