MNI: Fed’s Schmid - Rates Could Stay High ‘For Some Time’

U.S. interest rates could stay high for a while and Federal Reserve policymakers can be patient about keeping borrowing costs at 23-year highs, Kansas City Fed President Jeffrey Schmid said Tuesday.

“My own view is that interest rates could remain high for some time. The economy has undergone seismic shifts so far this decade,” he said in prepared remarks to a summit at the Kansas City Fed, adding that "policy is in the correct place."

“I have no certainty that we are headed back to the low interest rate environment that prevailed in the decade prior to the pandemic.”

Inflation remains well above the central bank’s comfort level and thus there is no clear reason to consider changing the course of policy in the near-term, Schmid said.

“inflation is still too high. The Fed is committed to bringing inflation back to its 2% objective. So far this year, prices have been increasing at about twice that pace, suggesting that the Fed has more work to do,” Schmid said.

“I am prepared to be patient as this process plays out. This will require a data-dependent approach that looks at the data over time rather than loading too much weight on any one release." (See: MNI INTERVIEW: Demand Boom Keeps Fed Patient For Longer-Koenig)

DEFICIT WORRIES

One thing putting upward pressure on U.S. interest rates are large and growing budget deficits at home and abroad, Schmid said.

“One factor that I view as particularly important here is the prospect of continued large fiscal deficits and the tremendous expansion of government debt, both in the United States and throughout the world,” he said. (See MNI INTERVIEW: Kaplan Says Loose Fiscal Holding Up Fed Cut)

"In the end, large fiscal deficits will not be inflationary because the Fed will do its job and achieve its inflation objective, through in doing so the outcome could be persistently higher interest rates."

That is also one reason why Schmid reaffirmed his support for aggressively shrinking the balance sheet beyond the Federal Reserve’s current plans. The central bank announced this month that it would slow the pace of Treasury runoffs to USD25 billion per month.

“Maintaining a large balance sheet can give the uncomfortable impression that monetary and fiscal policy are intertwined. Maintaining an excessively large Treasury portfolio can give the impression that the Fed’s balance sheet is supporting government debt markets,” Schmid said.