MNI: Fed's Schmid Says His Concerns Over Inflation Grow
MNI (WASHINGTON) - Elevated inflation and rising inflation expectations since the start of the year are sowing doubts over whether price pressures will continue to ease, Federal Reserve Bank of Kansas City President Jeff Schmid said Thursday. He also reaffirmed his desire to keep QT going as long as possible to shrink the balance sheet to a smaller size.
"The recent inflation data raise concern," Schmid said in remarks prepared for a United States Department of Agriculture outlook forum in Arlington, Virginia. He noted inflation has run at 2.5% over the past year, and has been "more or less stuck" at 2.75%, excluding energy prices. "In a speech I gave in early January, I expressed optimism that inflation would continue to ease. However, I have become more cautious."
The past two months have also seen a sharp upward movement in some measures of inflation expectations, he said. "Survey measures of inflation expectations are imperfect and subject to noise, but with inflation just recently at a 40-year high, now is not the time to let down our guard."
With inflation risks to the upside, the Fed faces an additional wrinkle that elevated uncertainty could weigh on growth, Schmid said.
"This presents the possibility that the Fed could have to balance inflation risks against growth concerns," he said. "In part informed by this history, I intend to keep my eye focused on inflation. It is essential that the Fed remain vigilant and maintain its hard-fought credibility."
QT
Schmid added that he prefers to continue to shrink the balance sheet and the Fed’s financial footprint "as much as possible consistent with the Fed’s current operating framework." The FOMC discussed whether to pause or slow QT during debt limit negotiations at their last meeting in January, according to the meeting minutes.
The Fed's large balance sheet continues to weigh on yields and flatten the yield curve, he said. "It is important that we reduce our footprint in financial markets and allow the yield curve to fully steepen." (See: MNI POLICY: Fed Seeks Market Signals To End QT, Pause Possible)