“Restrictions lead to difficult decisions about how to balance competing objectives, and the Fed is charged with these difficult decisions when it comes to inflation and employment,” he said. “To offset this limitation, I believe the Fed must maintain its credibility on inflation.”
He said inflation expectations remain stable, but warned this could change quickly if policy eases too quickly.
“I don’t view inflation expectations as an input or signal that the Fed must respond to, but as the outcome of the policy decisions the Fed makes,” he said.
Schmid told the room he will continue to take a “data-dependent” approach ahead of the next meeting of the Federal Open Market Committee (FOMC) on October 28-29.
“While I am hopeful that the government data underlying Fed decision-making will be available again soon, I will be closely monitoring alternative labor market and price data in the meantime,” he said. “[That includes] data we are collecting from district surveys and reports from our network of contacts as we approach our next FOMC meeting at the end of the month.”
Inflationary pressure
On the economy, Schmid said the Fed is “relatively close” to achieving its dual mandate of price stability and full employment — but “still not there yet.”
“Inflation is too high,” he said. “The Fed has defined price stability as inflation of 2%. During the 12 months ending in August, prices rose 2.7%. Excluding the effects of a recent decline in gas prices, the inflation rate was closer to 3%.”
Schmid pointed to continued price pressures for both goods and services, citing housing costs, utilities and electricity as key factors. He also noted that tariffs have pushed durable goods prices higher than historical trends.
A worrying sign is that price increases are also becoming more common.
“At the beginning of the year, 70 percent of consumption categories reported price increases. In August, almost 80 percent of categories had increasing prices,” he said.
Cooling of the labor market, but in balance
On the employment front, Schmid said the labor market has cooled significantly this year, which could help alleviate inflationary pressures while introducing some risk.
“Job growth has slowed dramatically since April,” he said. “On average, employers added about 25,000 jobs per month, compared with an average of more than 200,000 per month in the three years to April.”
Still, the labor market remains fundamentally stable, Schmid added.
“The unemployment rate is 4.3%, which is low compared to most of the country’s history,” he said. “Another common indicator, the vacancy ratio, or the number of vacancies posted per person reporting themselves as unemployed, remains close to one – right in line with the level consistent with a healthy balanced labor market.
“Looking at the range of labor data included in the Kansas City Fed’s aggregated Labor Market Condition Indictors indicates a labor market that has cooled but remains healthy.”
Policy ‘only slightly restrictive’
Schmid said that while the labor market slowdown suggests policies are restrictive, financial conditions remain fairly accommodating.
“Equity markets continue to reach near record highs, corporate bond spreads are very tight and junk bond issuance is high,” he said. “None of this suggests that financial conditions are particularly tight or that policies are restrictive.”
He added that investments in artificial intelligence and other technology continue to drive growth – with software spending reportedly growing at the fastest pace on record in the second quarter.
“Overall, given the state of the economy and financial markets, I view the current policy stance as only somewhat restrictive, which I think is the right place,” Schmid said.
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