Fed’s Schmid: Inflation is too high
Kansas City Federal Reserve (Fed) President Jeffrey Schmid said on Tuesday that the muted impact of tariffs on inflation should be seen as evidence that monetary policy is “appropriately calibrated,” not as a reason to cut interest rates.
Key Quotes
- Retaining a modestly restrictive policy stance is appropriate for now.
- Supports a patient approach to changing the Fed’s policy rate.
- Says the policy rate is not far from neutral, but inflation remains too high.
- Notes that tariffs’ limited effect on inflation is a reason to keep policy on hold, not to cut rates.
- Adds that the likely muted impact of tariffs on inflation suggests policy is appropriately calibrated.
- Sees no chance of knowing the full effect of tariffs on prices in the next few months.
- Will adjust views if there are signs of significant weakening in demand growth.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
Author
Pablo Piovano
FXStreet
Born and bred in Argentina, Pablo has been carrying on with his passion for FX markets and trading since his first college years.
