Federal Reserve ‘has some work to do on inflation,’ Kansas City Fed chief says

THE US Federal Reserve has the tools and responsibility to deal with price pressures that are “running too hot”, and the central bank “has some work to do on inflation,” Kansas City Federal Reserve President Jeff Schmid said on Sunday (Nov 15).

Schmid, speaking to a credit union conference in Hawaii, did not specifically call for additional rate hikes, but said inflation is “uncomfortably above the 2 per cent price stability target, and moving in the wrong direction.”

Common narratives that have recently evolved around the nature of current inflation and the Fed’s ability to contain it are off-base, Schmid said.

First, Schmid said, the view that high inflation is a reflection of repeated supply shocks neglects that “inflation is always the result of an imbalance between supply and demand. 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.”

Schmid, who is not a Federal Open Market Committee voting member this year, said he also disagrees with the narrative that the sources of demand-induced inflation right now - like the artificial intelligence buildout - are resistant to Fed policy.

The Fed raised rates by a quarter-percentage point in September to 3.75-4 per cent but opted not to lift them again at last month’s meeting.

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Following recent inflation readings that were higher than expected and comments from other Fed officials, including influential Governor Christopher Waller, interest rate futures markets are now fully priced for a quarter-point increase at December’s meeting, with a small probability of a half-point hike.

“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,” Schmid said.

“Both narratives - that inflation is being driven by either supply shocks or by demand that is impervious to higher interest rates - have a common core,” Schmid said.

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“Mainly, that inflation is somehow beyond the Fed’s power to control. I don’t believe this to be true. 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.” REUTERS