Fed’s Schmid Warns: Inflation Risks Run Deeper Than Tariffs as Policy Stays Firm

Federal Reserve officials continue to shape expectations around the path of US monetary policy, and the latest voice to enter the debate is the President of the Kansas City Federal Reserve Bank, Jeffrey Schmid. Speaking at a joint energy conference in Denver, Schmid delivered a pointed message: the fight against inflation is far from over, and the risks extend well beyond tariff-related pressures.

Schmid emphasized that the central bank must remain disciplined as it navigates a complex economic environment. While the labor market has begun to cool, he argued that it still remains broadly balanced—an important signal for policymakers trying to determine whether the economy can withstand current levels of restrictive policy. He noted that monetary policy today is “modestly restrictive,” which he believes is the appropriate stance given the ongoing imbalances between supply and demand.

A key theme of Schmid’s remarks was the breadth of inflationary pressure. He rejected the idea that tariffs alone are responsible for keeping price growth elevated, explaining that underlying forces—structural shifts in the labor market, strong household demand, and persistent service-sector inflation—continue to complicate the Fed’s work. For this reason, he warned against complacency, stressing the need for policymakers to remain vigilant and focused on overall inflation trends rather than isolated components.

Schmid also addressed his earlier dissent in October, affirming that the reasoning behind it continues to guide his approach as the December meeting approaches. His caution reflects a wider concern that additional rate cuts could weaken the Fed’s ability to restore price stability without reigniting inflationary pressure. Cutting rates too quickly, he argued, may patch short-term cracks in the labor market but risks doing longer-term damage to inflation credibility.

Financial markets, according to Schmid, do not appear to be excessively restricted at present. He pointed out that neither overall economic activity nor market conditions show signs of undue stress, reinforcing his view that the current stance of policy is appropriate. That said, he highlighted several tools the Fed could use to adjust liquidity conditions if needed. These include lowering the rate paid on reserves, easing access to its standing repo facility, or shifting the balance sheet toward shorter-duration securities.

Schmid additionally voiced support for the decision to stop reducing the Fed’s balance sheet. He argued that the institution has room to operate with a smaller balance sheet while still maintaining adequate liquidity in the system, though he expressed doubt that reserve demand will grow in line with nominal GDP over time.

His remarks come at a moment when currency markets continue to react sharply to evolving expectations around Fed policy. The US Dollar showed notable strength during the day, outperforming several major currencies, particularly the British Pound. Movements across EUR, JPY, AUD, CAD, and CHF reflected a landscape still highly sensitive to every new signal from Federal Reserve officials.

Together, Schmid’s comments send a clear message: the Fed remains cautious, data-dependent, and focused squarely on inflation’s underlying drivers. With the labor market shifting, price pressures lingering, and global uncertainties persisting, policymakers appear unwilling to declare victory too soon. Investors looking for a swift return to easier monetary conditions may find themselves waiting longer than expected as the Fed continues its careful balancing act.