Fed's Schmid says rates still accommodative as inflation holds at 3.7%

Kansas City Fed President Jeff Schmid said current short-end rates "may still be accommodative" with inflation running at 3.7%, suggesting the Federal Reserve's tightening cycle may extend beyond what markets currently price.

"It's still stubborn and it's still sticky, and we've got to continue to find ways to break through," Schmid said Thursday in an interview at the Kansas City Fed's Jackson Hole symposium. "We're going to have our work cut out for us as we move into the FOMC cycle."

The Commerce Department reported Wednesday that the Fed's preferred inflation gauge rose 3.7% in July from a year earlier, up from 2.9% before the Iran war began in late February. Core prices, stripping out food and energy, held at 3.3%. The fed funds rate target stands at 3.5% to 3.75%, and Schmid questioned whether that level is actually constraining economic activity. "I don't know what we're restricting currently with the rate policy that we're at today," he said.

Schmid's remarks land as the FOMC's July meeting produced three dissents in favor of an immediate quarter-point increase — from Cleveland Fed President Beth M. Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie K. Logan — the most fractured vote in years. New Fed Chair Kevin Warsh delivers his first Jackson Hole address Friday, and Wall Street will parse his language for clues on whether the committee moves toward another hike at the October meeting.

The Kansas City Fed president, who does not hold a formal vote on the FOMC this cycle but attends and weighs in at meetings, said he wants more data before taking a position on a rate increase. "I think we need a little bit more information. What I'm trying to figure out is the demand side of what's driving both growth and inflation," he said.

With the economy growing at 1.5% in the second quarter and unemployment at 4.1%, Schmid's assessment that current policy may not be restrictive enough carries weight among officials who voted for a hike in July. Minutes from that meeting showed hawkish sentiment ran broader than the three dissenters, with some officials questioning whether financial conditions were tight enough to return inflation to 2%. Neither Schmid nor St. Louis Fed President Alberto G. Musalem held votes in July, but both indicated afterward they would have backed a rate increase.

Schmid's hawkish stance is consistent with his voting record. In 2025, when he did hold a vote on the FOMC, he registered two dissents opposing rate reductions — a track record that suggests he will continue to push for tighter policy.

Politics stays out of the equation

Asked whether the midterm elections could influence the Fed's October decision, Schmid was unambiguous. "That's certainly not in my consideration equation," he said, emphasizing that rate decisions should be driven by economic data and inflation trends, not political calendars.

The political independence question has taken on added significance as President Donald Trump has threatened new tariffs on Canada and China, and as the Iran war keeps gas prices elevated. Gas prices have rebounded this month, which will likely push inflation higher when August figures are reported next month.

What happens next

The October FOMC meeting will be the first real test of whether Schmid's view prevails. If inflation continues to run above target and gas prices keep climbing, the case for a quarter-point hike strengthens. If the data cools, the committee may hold steady and wait for the lagged effects of prior tightening to work through the economy.

Schmid also floated support for a structural change: reducing the number of FOMC meetings each year from eight to six, a proposal Chairman Warsh raised in July. Schmid said there is "some room" to give the idea serious thought.

The stakes are high for markets. A rate increase in October would mark the first hike since the Fed began its current tightening trajectory, pushing borrowing costs higher for households and businesses already grappling with elevated prices. Equities would face pressure as the discount rate on future earnings rises, while Treasury yields would likely climb across the curve.

This article is for informational purposes only and does not constitute investment advice.