MNI: Fed’s Schmid Says Rates Nearing Neutral, Can Be Patient
MNI (WASHINGTON) - The Federal Reserve’s interest rate setting is getting closer to neutral levels that are likely to be higher than in the past, Kansas City Fed President Jeffrey Schmid said Thursday.
“With inflation close to target and growth showing continued momentum, I believe we are near the point where the economy needs neither restriction nor support and that policy should be neutral,” Schmid said.
“I am in favor of adjusting policy gradually going forward and only in response to a sustained change in the tone of the data. The strength of the economy allows us to be patient.” (See MNI INTERVIEW: Fed Won't Consider Cuts Until March-Benigno)
He said the Fed is currently “pretty close” to meeting its dual mandate goals of price stability and full employment.
Schmid, who this year is a voting member of the FOMC for the first time, said the neutral level of interest rates has likely risen due to factors ranging from stronger productivity to higher deficits.
“There are many good reasons to expect that interest rates might settle at a higher neutral rate than we saw before the pandemic, including strong growth and investment demand, perhaps related to recent robust productivity growth and the prospect of exciting new technologies like artificial intelligence,” he told the Economic Club of Kansas City in prepared remarks.
“More concerning, interest rates could also settle higher on account of the continued deterioration of the U.S. fiscal position and an abundance of Treasury borrowing that needs to be financed. My read is that interest rates might be very close to their longer-run level now.”
CONFIDENT IN DISINFLATION
Schmid said he’s confident the recent disinflation trend will continue because supply chains have bounced back, tight job market conditions have eased and inflation expectations are well under control.
“I am fairly optimistic that inflation will continue to move in the right direction. Some of the continued stickiness of inflation has been in slow-moving components, like rents, where more forward-looking measures, such as new tenant leases, point to a further easing of inflation,” he said.