US stock market | Fed’s Schmid warns inflation is still too high, signaling no urgency for Fed easing

Kansas City Federal Reserve President Jeffrey Schmid reiterated his opposition Tuesday to further rate cuts, arguing that inflation remains too high and the U.S. labor market is largely in equilibrium.In remarks to the Metro Denver Executive Club, Schmid said inflation has been above the Federal Reserve’s 2% target for nearly five years. He warned that demand continues to outstrip supply, causing service prices to rise at a pace inconsistent with a sustainable return to the central bank’s inflation target. According to Reuters, Schmid emphasized that policymakers cannot afford complacency as long as price pressures persist.

Schmid did not directly address the economic fallout from the escalating conflict involving Iran, although Reuters reported that the volatile situation in the oil-rich Middle East could heighten concerns about renewed inflationary pressures, especially through energy markets.The Kansas City Fed chairman has consistently opposed further monetary easing. Reuters noted that he disagreed with two rate cuts last year and supported the Federal Reserve’s decision last month to keep short-term interest rates in the range of 3.50% to 3.75%.

Inflation is currently near 3%, Schmid said, highlighting the economic costs of higher prices. A one percentage point increase in inflation reduces the purchasing power of American households by an estimated $300 billion, he added, underscoring the tangible impact on consumers.

Financial markets had previously expected that signs of a deterioration in the labor market, cooling inflation, or both, would prompt the Federal Reserve to resume interest rate cuts by mid-year. However, Reuters reported that since the US and Israel launched attacks on Iran this weekend, traders have raised expectations for the next rate cut further into the year, reflecting increased uncertainty and inflation risks linked to geopolitical tensions.

Schmid said he remains optimistic about economic growth in the coming year, citing encouraging signals from business contacts. He also expressed confidence that tax reforms under Donald Trump’s administration would boost economic expansion.Also read: World Market | Investors are scrambling for cash as the Iran crisis rocks markets

At the same time, he rejected arguments that advances in artificial intelligence are currently boosting productivity gains strongly enough to enable faster, non-inflationary growth. While acknowledging the longer-term potential of AI and other innovations to support a supply-driven expansion cycle, Schmid indicated that current inflation rates indicate the economy has not yet reached that stage.

Overall, his comments reinforced a cautious stance within the Federal Reserve, emphasizing vigilance against persistent inflation even as markets weigh geopolitical risks and evolving growth prospects.

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