By Ann Saphir
(Reuters) -Kansas City Federal Reserve Bank President Jeffrey Schmid on Monday used a debut speech on policy to signal that he remains focused on the threat of high inflation and is in no rush to cut interest rates.
“With inflation running above target, labor markets tight and demand showing considerable momentum, my own view is that there is no need to preemptively adjust the stance of policy,” Schmid said in his first extensive public remarks since he began the job last August. “Instead, I believe that the best course of action is to be patient, continue to watch how the economy responds to the policy tightening that has occurred, and wait for convincing evidence that the inflation fight has been won.”
Schmid’s approach suggests a hawkish outlook in sync with recent Kansas City Fed presidents; indeed, he told the Economic Club of Oklahoma that both Esther George and Thomas Hoenig are “dear friends.”
His approach is also one that resonates at least for now with the message of other Fed policymakers in recent weeks signaling they want to keep the policy rate in its current 5.25%-5.5% range until they have greater confidence that inflation is headed to the Fed’s 2% goal.
Shipping disruptions in the Red Sea could put renewed upward pressure on goods prices, Schmid said, and hotter-than-expected consumer price inflation in January, especially for services, argues for “caution” on expectations for further disinflation.
“A further moderation in demand could be needed to tame price and wage pressures,” he said.
Schmid also signaled hawkishness with regards to the Fed’s balance sheet. He said he is in “no hurry” to halt the ongoing reduction in the size of the balance sheet, and does not favor an “overly cautious approach” on the runoff.
Some Fed policymakers have argued that the time may soon come to slow those reductions to give time for the Fed to assess how far it can shrink its portfolio without roiling markets.
“Some interest-rate volatility should be tolerated as we continue to shrink our balance sheet,” Schmid said. Shrinking the balance sheet and reducing the Fed’s footprint in financial markets should be a priority, he added.
In addition, Schmid said, banks should treat the Fed’s discount window, the U.S. central bank’s facility for extending emergency loans, as part of their “strategic stack” for funding rather than just in times of crisis.
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