Fed's Powell: Slowing rate cuts to ensure economic stability

According to the Zhitong Finance APP, Jeffrey Schmidt, President of the Federal Reserve Bank of Kansas City, advocated slowing down the pace of interest rate cuts in a public speech to address the current economic uncertainties. Schmidt believes that the Fed should pursue a more normalized policy cycle, maintaining economic growth, price stability, and full employment through moderate adjustments. He emphasized that slowing down the rate of interest rate cuts would help the Fed determine the neutral interest rate level, where policies neither hinder nor stimulate the economy. Schmidt stated that although he is optimistic about achieving this cycle, he advocates for a cautious and gradual policy approach.

It is understood that against the backdrop of signs of weakness in the labor market and inflation rates close to the Fed's 2% target, policymakers decided to cut interest rates by half a percentage point at last month's meeting, marking the first rate cut since the outbreak of the pandemic.

In response, Schmidt supports reducing policy constraints but leans towards avoiding taking excessive measures to prevent exacerbating financial market turmoil. However, economic data since the September meeting has shown that recruitment over the past three months has been stronger than expected. The market expects the Fed to make a small rate cut of 25 basis points at the November meeting.

At the same time, Schmidt observed a normalization in the labor market rather than a severe deterioration, noting that employers are no longer hoarding workers as they did after the pandemic, and recruitment enthusiasm has also declined. He believes that these adjustments will temporarily curb the weakness in the labor market.

As the President of the Federal Reserve Bank of Kansas City and a voting member for next year's monetary policy decisions, Schmidt predicts that future interest rates will be significantly higher than the average level of the past decade before the pandemic. This expected increase may be driven by improvements in productivity, increased investment, and the accumulation of government debt.

Furthermore, Schmidt also pointed out that structural factors existing before the pandemic, such as aging populations, have not disappeared and will continue to impact the economy.

Schmidt warned that rapid interest rate cuts could lead to financial market turmoil, which could also complicate the Fed's efforts to shrink its balance sheet. He noted that the Fed's large balance sheet has narrowed the traditional gap between short-term and long-term interest rates, distorting credit allocation.

Schmidt believes that for the long-term health of the banking industry, a positively sloped yield curve is needed, and a smaller balance sheet focused on short-term securities will reduce the impact on the slope of the yield curve.

It is worth mentioning that other Fed officials, such as Dallas Fed President Lori Logan and Minneapolis Fed President Neel Kashkari, have also expressed their lack of support for significant rate cuts again, preferring to make small cuts while the central bank continues to lower rates.

In particular, Logan emphasized that officials should act cautiously in times of high economic uncertainty, while Kashkari predicted some moderate rate cuts over the next few quarters to reach a neutral level, depending on the data