Federal Reserve Bank of Kansas City President Jeff Schmid said the US central bank should hold rates at a "somewhat restrictive" level, as he expressed continued concerns over inflation that remains too high.
"In my view, further rate cuts risk allowing high inflation to persist even longer," Schmid said Wednesday in prepared remarks for an event in Albuquerque, New Mexico.
He added that interest rates should still be putting some pressure on the economy, but that may not be the case.
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"With growth showing momentum and inflation still hot, I'm not seeing many indications of economic restraint," Schmid said.
Fed officials kept interest rates unchanged last month, a decision Schmid said he supported, following three consecutive rate cuts in the final months of 2025. The benchmark federal funds rate is now in a range of 3.5% to 3.75%, at or near many officials' estimates of neutral — the level at which rates neither weigh on nor stimulate the economy.
Schmid said continued price pressures show demand is outpacing supply in much of the economy. While new innovations such as artificial intelligence may eventually drive productivity growth higher, allowing the economy to expand without driving inflation up, "we are not there yet," he said.
Schmid's remarks came shortly after government data showed US payrolls rose in January by the most in more than a year and the unemployment rate unexpectedly fell to 4.3%.
The Kansas City Fed chief acknowledged strong growth in 2025 and said the economy is entering 2026 with "considerable momentum."
Schmid also repeated his view that the composition of the Fed's Treasury holdings should mirror the overall market. By concentrating new purchases in Treasury bills, he said, the Fed is moving in this direction. Shifting the balance sheet to a more market-neutral position will also ensure that the Fed remains independent, he said.
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"If the Fed maintains a large, long-duration balance sheet — one comprised partly of mortgage securities — we risk intertwining the roles of the Fed and Treasury," Schmid said. "This can blur the lines between monetary and fiscal policy and threaten the Fed's independence. The more the lines between monetary and fiscal policy become blurred, the greater risk that the Fed's balance sheet is no longer viewed as solely a tool of monetary policy."
President Donald Trump last month said he planned to nominate Kevin Warsh to succeed Jerome Powell when his term as Fed chair expires in May. Warsh has called for overhauling the relationship between the Fed and the Treasury.
