Kansas City Fed’s Schmid Says Inflation Still Too Hot, Pushes Back on ‘Beyond Fed Control’ Talk — BigGo Finance

Kansas City Federal Reserve President Jeff Schmid said Sunday that U.S. inflation remains “uncomfortably above the 2% price stability target, and moving in the wrong direction,” adding that the central bank still has the tools and the duty to bring price growth back to target.

Speaking at a credit union conference in Hawaii, Schmid did not explicitly call for further rate increases. But his remarks, delivered during a blackout period ahead of the December policy meeting, amounted to a rebuttal of two arguments that have gained ground among investors and some economists: that price pressures stem mainly from repeated supply disruptions, and that demand tied to the artificial intelligence buildout is largely immune to higher borrowing costs.

The view that supply shocks explain the inflation problem ignores a basic point, he argued. “Inflation is always the result of an imbalance between supply and demand,” Schmid said. “It is in the context of strong demand that a disruption to supply drives up prices. Demand always plays a role in inflation, and the Fed, through its influence on demand, always has the tools and responsibility to address inflation.”

He was equally dismissive of the notion that the Fed would need to target a specific basket of goods, such as AI-related technology equipment, to restore price stability. “I would also push back on the idea that meeting our inflation objective requires a reaction from any particular set of prices, for example prices for AI-related technology goods,” he said.

Both narratives share a common thread, according to Schmid: the implication that inflation is outside the central bank’s reach. “Mainly, that inflation is somehow beyond the Fed’s power to control. I don’t believe this to be true,” he said. “The Fed does have the tools to address inflation and has the responsibility to achieve price stability. As Chairman (Kevin) Warsh said, we have work to do.”

Schmid is not a voting member of the Federal Open Market Committee this year. The Fed lifted its benchmark rate by a quarter percentage point in September to a range of 3.75% to 4.00%, then held steady at last month’s meeting.

Rate futures markets have since moved sharply. After a string of inflation readings came in above expectations and several policymakers, including influential Governor Christopher Waller, sounded a hawkish note, traders now fully price a quarter-point increase at the December gathering, with a small chance of a half-point move.

A day earlier, Boston Fed President Susan Collins told reporters at a housing conference hosted by her bank that a measured approach to tightening remains her preference. “A steady, gradual path seems appropriate to me at the moment. But I’m open-minded,” she said.

Collins described the risks to the real economy as two-sided. Inflation is elevated and price gains are broadening, while the labor market has stabilized and could pick up speed. At the same time, fresh shocks could hit the economy, and the rise in medium- and longer-term interest rates since the start of the year may be weighing on demand more than she had assumed, adding an unintended source of restraint.

Those considerations argue against a faster pace of increases, she said, particularly with inflation having exceeded the 2% goal for more than five years. She cautioned that gradualism “doesn’t necessarily mean a particular cadence,” and acknowledged that recent data have shifted her view of where the tightening cycle may end. “I do think that the price data we’ve seen over the past three months — and the labor market on a stronger footing — does make me think that the path of policy rates over the, you know, next year might be a bit higher than I had thought a couple of months ago,” Collins said.

Key policy markers heading into December:

Note: Rate range and market pricing as described in the source material.

The two officials’ comments sketch the boundaries of the debate inside the committee. Schmid, a non-voter this year, is making the case that the Fed should not hide behind supply-side explanations or treat the AI investment boom as a special case exempt from monetary policy. Collins, who also is not emphasizing a specific timetable, is signaling that the pace of any further moves matters as much as the destination, given how much tightening may already be working through rate-sensitive sectors.

For markets, the immediate takeaway is that the bar for a December increase has effectively been cleared, with the debate now centered on how far rates go in 2027 rather than whether another move happens this year. That has implications across asset classes. Short-dated Treasury yields, which are most sensitive to near-term policy expectations, would likely extend gains if the December hike is delivered as priced, while the long end faces a more complicated picture: Collins’ suggestion that higher long-term rates may already be restraining demand cuts both ways, supporting the case for caution while also hinting that financial conditions are doing some of the Fed’s work.

Equities tied to the AI buildout face a specific risk from Schmid’s argument. If policymakers conclude that demand from data-center and chip investment is responsive to interest rates, the sector loses its implicit exemption from tightening, and valuations that rest on years of unimpeded capital spending become more vulnerable to a higher discount rate. Rate-sensitive sectors such as housing and consumer credit, already strained by elevated borrowing costs, would feel the pinch of any further increases, a tension Collins acknowledged in noting that tighter financial conditions may be doing more than she had expected.

The dollar stands to benefit from a more hawkish near-term path, particularly against currencies whose central banks are easing or holding steady. For investors positioned for a prolonged pause, the message from both officials is that the easing bias is not on the table while inflation runs above target and the labor market holds firm.

Background: the Fed has kept its policy rate in a restrictive stance for an extended period as inflation proved stickier than officials anticipated. The September increase was the first in a stretch, and the October hold reflected a wait-and-see posture that the latest price data have now complicated. With the target not met for more than five years, the committee faces pressure to demonstrate that its 2% commitment is credible, a theme Schmid returned to repeatedly in his remarks.