Fed’s Schmid: Large fiscal deficits won’t cause inflation, because Fed will raise rates

Federal Reserve (Fed) Bank of Kansas President Jeffrey Schmid struck an overall positive tone on Tuesday, stating that he believes inflation and employment are both heading toward desired levels. However the Fed policymaker did caution investors that while the Fed isn’t planning pre-emptive measures for government policies that may arise next year, the Fed has more than enough ammunition to head off inflationary pressures that could arise from spiraling government budgets and inflation-stoking immigration policies that loom over the US’ next presidency.

Key highlights

Rate cuts are an acknowledgment of fed’s confidence inflation is on a path to 2% target.

Large fiscal deficits will not cause inflation because the Fed will prevent it, though that could mean higher interest rates.

Now is the time to dial back restrictiveness of policy.

I see full employment, inflation trending lower and solid growth.

It is not my expectation that we’d see pre-pandemic rates.

Rates are still somewhat restrictive, but not overly so.

Until policy is enacted, it is not important to Fed discussions.

Coming tariff and immigration policies will be relevant to the Fed if they impact employment and inflation.