Fed’s Schmid warns against rate cuts amid "hot" inflation

Investing.com -- Kansas City Federal Reserve President Jeffrey Schmid cautioned on Wednesday that the U.S. central bank should maintain tight monetary policy as economic growth remains strong and inflation elevated.

Speaking at an economic forum in Albuquerque, New Mexico, Schmid said, "With inflation still running hot, it appears that demand is outpacing supply across much of the economy."

Schmid expressed skepticism about relying on productivity gains or artificial intelligence as immediate solutions for inflation concerns. While acknowledging these factors could potentially enable "a non-inflationary, supply-driven growth cycle," he emphasized "we are not there yet" and argued for keeping interest rates high enough to curb spending and investment.

"Further rate cuts risk allowing high inflation to persist even longer," Schmid warned, noting the economy may continue to grow above trend. He indicated the current inflation rate, which remains close to 3%, shows strong demand is outpacing supply improvements.

The Kansas City Fed president suggested recent productivity improvements might stem from reduced labor market turnover rather than technological advances. "My contacts broadly agree that we are now in a low-hire, low-fire, low-quit labor market. One positive from this lack of churn is higher productivity," said Schmid, who is not a voting member of the Fed’s policy committee this year. "It is not clear if productivity will continue to grow at this pace."

His comments contrast with the Trump administration and Fed chief nominee Kevin Warsh, who have cited strong productivity data as justification for lowering interest rates.

The Fed maintained steady interest rates at its policy meeting last month and is expected to keep them unchanged at least until its June 16-17 meeting. A stronger-than-expected January jobs report released Wednesday reinforced this outlook.

New U.S. inflation data is scheduled for release on Friday.

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