Cutting rates could make inflation worse

Kansas City Fed president Jeff Schmid said Thursday he thinks inflation remains too high and cutting interest rates could drive it higher, eclipsing any benefit to the job market.

“Right now, I see an economy that is showing momentum and inflation that is too hot,” Schmid said in a speech in Kansas City. “Cutting rates could disproportionately harm the inflation side of our mandate without providing much benefit to the employment side … I don’t think that monetary policy is currently very restrictive.”

A staunch hawk, Schmid has dissented at both of the last two policy meetings when the Fed cut its benchmark rate by 25 basis points. Schmid preferred not to lower interest rates for fear of igniting inflation.

He said the neutral interest rate — the level designed to neither spur nor slow economic growth — has moved up and that the current range of 3.5% to 3.75% is no longer very restrictive.

Although housing costs and rents are moderating, and Schmid is hopeful inflation will ease, he said, “I am reluctant to step back until I see more convincing signs that overall inflation is headed in the right direction.”

Read more: Jobs, inflation, and the Fed: How they’re all related

The latest inflation data, including the release of the Consumer Price Index for December, is consistent with an inflation rate that remains close to 3%, Schmid reasoned. What’s more, prices and inflation remain a top concern in discussions he has with businesses in his district.

Schmid said he’s concerned that by cutting rates, the Fed risks moving away from a world where inflation is low and stable and does not materially enter into the decisions of households and firms.

He also warned that the Fed’s ability to get a clean reading on inflation through official data is clouded because of last year’s government shutdown.

Schmid’s comments come as President Trump has hammered the central bank for lower rates and as Fed Chair Jay Powell revealed Sunday night he’s being investigated by the Department of Justice. That inquiry is ostensibly related to Powell’s testimony before the Senate last summer about the Fed’s renovations of its headquarters, but Powell said it’s actually about the ongoing friction over interest rates.

The Fed is set to meet again on Jan. 28. Officials are expected to hold rates steady in the range of 3.5% to 3.75%.

Also on Thursday, Fed governor Michael Barr told Yahoo Finance that interest rates are “in a good place now” and that the central bank will need to “take some time … really into the spring” to gain a good understanding of the state of the job market and inflation.