Fed's Schmid Says Policy Not Restrictive, Tighter Rates Needed for 2% Inflation

Kansas City Federal Reserve President Jeff Schmid said Tuesday that monetary policy is not restrictive and that returning inflation to 2% will require tighter policy. His remarks came less than a week after the Fed held interest rates at 3.50%-3.75%, a decision that three officials opposed, favoring a quarter-point hike. Inflation has exceeded the Fed's target for more than five years, prompting renewed debate among policymakers about the appropriate stance of monetary policy.

Schmid States Current Policy Lacks Restriction

Speaking at a Kansas City Fed event in Omaha, Schmid said inflation remains his primary concern. He stated, "Given the strength of demand and investment, I do not see the current stance of monetary policy as restrictive. As such, I believe that bringing inflation down to the Fed's 2% objective will require tighter policy."

Schmid also cautioned against treating supply-driven price inflation pressures as temporary. He argued that such shocks produce larger inflation surges when demand stays strong. Schmid does not vote on rate decisions this year. However, his stance echoes the three dissenters who split the FOMC 9 to 3 last week. The decision has already rattled investors, sending the Dow sliding and 30-year Treasury yields to 2007 highs.

Paulson Describes Policy as Mildly Restrictive

Philadelphia Fed President Anna Paulson took a different stance, telling CNBC that policy is already mildly restrictive. She estimated underlying inflation between 2.4% and 2.8% once tariff and energy shocks are stripped out.

Paulson left no room for easing. Without further progress, she said, recalibration could mean higher rates or the same rates for longer. She stated, "I'm keeping an open mind about what's going to be appropriate."

CME FedWatch Data Shows September Hike Probability at 56.9%

Traders lean toward the hawks. CME FedWatch data show a 56.9% probability of a quarter-point hike in September, rising to 83.2% odds of at least one increase by December.

Odds for Fed Interest Rate Hike in September. Source: CMEFedWatch

Whether the hawks prevail may hinge on the next inflation prints. Hotter readings would strengthen Schmid's case and deepen pressure on rate-sensitive assets, including crypto.

FAQ

What did Kansas City Fed President Schmid say about monetary policy on Tuesday?

Schmid said Tuesday that monetary policy is not restrictive and that returning inflation to 2% will require tighter policy. He stated this at a Kansas City Fed event in Omaha, emphasizing that given the strength of demand and investment, he does not see the current stance of monetary policy as restrictive.

What are the odds of a Fed rate hike in September according to CME FedWatch?

CME FedWatch data show a 56.9% probability of a quarter-point hike in September. The odds rise to 83.2% for at least one increase by December, reflecting market expectations that the Fed will tighten policy further to address inflation concerns.