(Bloomberg) -- Federal Reserve Bank of Kansas City President Jeff Schmid said he favors slowing the pace of interest-rate cuts, though only after a persistent change in incoming economic data.
“I am in favor of adjusting policy gradually going forward and only in response to a sustained change in the tone of the data,” Schmid said Thursday in prepared remarks for an event in Kansas City. “The strength of the economy allows us to be patient.”
Schmid also emphasized that he believes rates are now close to a level where they neither restrict nor stimulate the economy. “My read is that interest rates might be very close to their longer-run level now,” he said.
Schmid, who votes on monetary policy this year, has favored a slower path of rate reductions over the last few months and in November expressed skepticism about how much further rates would need to come down.
Schmid said that while inflation hasn’t yet cooled all the way to the Fed’s 2% target, he’s optimistic that price pressures are still easing. He also described the labor market as healthy.
“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.
Fed officials lowered interest rates for a third consecutive time in December, bringing interest rates down to a range of 4.25% to 4.5%, but signaled they’d likely cut at a much slower pace this year. Policymakers penciled in just two reductions for 2025 at that meeting.
Schmid said he’ll continue to advocate for policies that will minimize the central bank’s footprint in financial markets, including the ongoing shrinking of the balance sheet.
Balance Sheet
Policymakers have been letting maturing Treasuries and mortgage-backed securities roll off the Fed’s balance sheet in an effort to shrink its size after it grew to nearly $9 trillion following the pandemic. Schmid said he’d like to see further declines this year.
“Shrinking our footprint will lessen our distortion of asset prices,” he said.
Schmid would also like the balance sheet to only hold Treasuries and its composition shifted more to shorter duration assets, positions that some of his colleagues also support.
The Fed has recently slowed the pace at which it shrinks the balance sheet, and many economists expect officials to halt the effort altogether at some point this year in order to preserve money-market liquidity.
Schmid started his speech with a short tribute to former President Jimmy Carter, whose funeral is today, praising his boldness in appointing Paul Volcker to be Fed chair, and also Carter’s “courage” in allowing the central bank to act independently, even when the aggressive interest-rate hikes under Volcker ultimately plunged the economy into recession and contributed to Carter’s political demise.
The Kansas City Fed chief then pledged, as part of three New Year’s resolutions, to help ensure that the central bank continues to be efficient, explaining the Fed’s many functions beyond the setting of monetary policy.
Incoming President Donald Trump — a frequent critic of the Fed who has said the president should have a say in monetary policy — has said he’ll overhaul government agencies to make them leaner, tasking Elon Musk and Vivek Ramaswamy with devising a plan to cut excess spending and staff.
Musk called the Fed “absurdly overstaffed” in a post last month on social-media platform X.
(Updates with deck headlines.)
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