Fed's Goolsbee, Schmid lay out case for interest rate pause

Vincent Alban/Bloomberg

• Key Insight: Both regional Federal Reserve presidents, who are voting members of the Federal Open Market Committee in 2025, said they wanted interest rates to remain unchanged because of inflation concerns and a lack of official data.
• Expert Quote: "Inflation remains too high, the economy shows continued momentum, and the labor market — though cooling — remains largely in balance." — Kansas City Fed President Jeffrey Schmid.
• What's at stake: Looking ahead, Fed watchers expect policy deliberations in 2026 among FOMC members to become even more divided as the economic outlook remains uncertain.

Two Federal Reserve officials who wanted to keep short-term interest rates unchanged at the December Federal Open Market Committee meeting offered slightly different explanations for their positions.

Kansas City Fed President Jeffrey Schmid and Chicago Fed President Austan Goolsbee explained their reasoning Friday, with the former expressing ongoing inflation concerns, while the latter cited a lack of data to justify a rate cut. At the December FOMC meeting, members voted to cut rates by 25 basis points, moving the policy rate to a range of 3.5% to 3.75%. The committee cut the federal funds rate by 75 basis points over the course of 2025. 

Schmid, who also dissented against a rate cut in October, said the data available and conversations with contacts in his district convinced him that inflation remains too sticky.

"Inflation remains too high, the economy shows continued momentum, and the labor market — though cooling — remains largely in balance," he said in a statement Friday. "I view the current stance of monetary policy as being only modestly, if at all, restrictive."

In his statement, Schmid, quoting former Chair Alan Greenspan, expressed concern that inflation is moving away from the ideal scenario in which it is "so low and stable over time that it does not materially enter into the decisions of households and firms."

"Analysis suggests that a fall in perceived inflation risk has been a major contributor to the downward trend in long-term interest rates in recent decades," Schmid said. "Any increase in inflation uncertainty could unfortunately reverse some of these gains, potentially increasing long-term interest rates, including on U.S. government debt."

Goolsbee, meanwhile, said it was the "more prudent course" to wait for additional information before lowering rates. Some key inflation and labor market data were delayed or only partially released because of a 43-day government shutdown this fall, but available indicators show inflation near 3% and labor market data pointing to continued softening. Goolsbee said taking the matter up in the new year "would not have entailed much additional risk."

"Given that inflation has been above our target for four and a half years, further progress on it has been stalled for several months, and almost all the businesspeople and consumers we have spoken to in the district lately identify prices as a main concern, I felt the more prudent course would have been to wait for more information," he said.

The Chicago Fed president disputed the idea that the labor market is in trouble, saying the current environment of low hiring and low firing is "more consistent with businesses dealing with continued uncertainty than it is with a conventional business cycle slowdown."

"If the labor market were deteriorating rapidly, it would be a different calculation," he said. "But most of the data we have show stable economic growth with a labor market only moderately cooling and with measures comparable to those in previous expansions."

He added that he's optimistic that interest rates will be cut significantly over the next year. "As I have reiterated for months, my unease is about too heavily front-loading rate cuts and just assuming that inflation will be transitory," he said. "Given the last several years, getting more evidence first feels like the wiser choice."

Alongside Goolsbee and Schmid, Federal Reserve Governor Stephen Miran also dissented at the December FOMC meeting, preferring a 50-basis-point cut. Miran, who joined the Fed in September, has called for a 50-basis-point cut at the September, October and December meetings.

Looking ahead, Fed watchers expect policy deliberations in 2026 among FOMC members to become even more divided as the economic outlook remains uncertain.

"Our view remains that the Fed will hold policy steady in January, with only 50bp of cuts in 2026 — most likely in March and June," said Gregory Daco, chief economist at EY-Parthenon, in a written statement. "These moves hinge on further cooling in labor market momentum and core [personal consumption expenditures] settling near 3% in early 2026. Market pricing is likely to remain volatile ahead of the combined October-November employment report on December 16 and the combined [consumer price index] release on December 18."