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A top Federal Reserve official has said the US central bank is “pretty close” to meeting its objectives on inflation and employment, underscoring investor expectations that policymakers will refrain from sharp interest rate cuts this year.
Jeff Schmid, the president of the Kanas City Fed who will become a voting member of the central bank’s policy-setting committee this year, on Thursday said he is “optimistic about employment and the strength of the economy”, and that inflation will continue easing in coming months.
“My read of the data is that we are currently pretty close to meeting our dual mandate of price stability and full employment,” Schmid said in a speech at the Economic Club of Kansas City.
Schmid added “interest rates might be very close” to levels that neither stimulate nor cool demand across the world’s biggest economy. One reason rates may settle above levels they had in the past is because “of the continued deterioration of the US fiscal position and an abundance of Treasury borrowing that needs to be financed”, he added.
Schmid’s remarks come just weeks before the Fed’s first meeting of 2025. The central bank reduced interest rates three times last year, including a jumbo 0.5 percentage point cut in September. At the time investors were primarily concerned high borrowing costs were crimping the jobs market, while it appeared policymakers were making strong progress in pushing inflation towards the Fed’s 2 per cent target.
But the jobs market has remained more resilient than many economists had forecast, while inflation has proved to be stickier. The core personal consumption expenditures price index, a key gauge of inflation, rose at an annual rate of 2.8 per cent in November.
Schmid said he was “fairly optimistic that inflation will continue to move in the right direction” and there were signs the “continued stickiness” in some components, such as rents, was easing.
The Fed in December unnerved investors by cutting interest rates by a quarter percentage point, but released projections from top officials that showed only two quarter-point rate cuts this year, compared with a September estimate of four such cuts.
The more hawkish forecast has ripped through fixed income markets, sending yields on US government debt higher. The benchmark 10-year Treasury yield traded at almost 4.7 per cent on Thursday, compared with September lows of about 3.6 per cent.
Markets are pricing in one or two quarter-point rate cuts this year, according to CME Group data based on federal funds futures.
Schmid said he was “in favour of adjusting policy gradually going forward and only in response to a sustained change in the tone of the data”.
He added: “The strength of the economy allows us to be patient.”
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