Fed's Schmid: Monetary policy should lean against demand growth with inflation too high

Core Viewpoint - The Federal Reserve is experiencing internal dissent regarding interest rate cuts, with some members advocating for a more hawkish stance due to concerns about inflation and economic momentum [2][5][14]. Economic Outlook - Kansas City Fed President Jeffrey Schmidt expressed that the economy is not showing signs of policy restriction and inflation is above the Fed's 2% target, suggesting that policy should counteract demand [2][4]. - Schmidt noted that inflation is spreading across both goods and services, indicating a broader economic concern [3][4]. Labor Market and Financial Conditions - The labor market is perceived as imbalanced, with signs of economic momentum, which complicates the case for further rate cuts [3][4]. - Financial market conditions are described as easy, with equities at record highs and narrow bond spreads, raising questions about the appropriateness of rate cuts in such an environment [3][5]. Fed Members' Perspectives - Both Schmidt and Dallas Fed President Lori Logan have expressed skepticism about the need for rate cuts, with Logan stating that the economic outlook does not support further cuts unless inflation decreases significantly or the labor market cools [4][5]. - The comments from Schmidt and Logan highlight a divided Fed, with some members firmly opposing further easing [5][8]. Market Reactions and Future Projections - Despite the dissent within the Fed, market expectations for a December rate cut remain high, with a 68% probability still indicated [7][8]. - The discussion around the Fed's decision-making process suggests that the economy must demonstrate a need for a cut, rather than the Fed needing to justify not cutting rates [10][12].