Capitalist Pig hedge fund manager Jonathan Hoenig discusses the continued impact of inflation on US finances and shares his exotic stocks of the week on Varney & Co.
The Federal Reserve cut rates last week for the second time in 2025, although a member of the central bank’s monetary policy committee voted against a rate cut, citing inflation concerns.
Policymakers at the Federal Open Market Committee (FOMC), which guides the Fed’s monetary policy, voted 10-2 in favor of cutting the Fed funds rate by 25 basis points to a target range of 3.75% to 4%. One dissenter, Fed Governor Stephen Miran, called for a larger cut of 50 basis points.
The other dissent was Jeffrey Schmid, president of the Federal Reserve Bank of Kansas City, who said in a dissenting statement that his “preference would have been to leave the target range unchanged” because the labor market is “broadly balanced, the economy is showing continued momentum, and inflation remains too high.”
Schmid said that in his conversations with contacts in the Kansas City Fed district, he has heard “widespread concerns about continued cost increases and inflation.”
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Kansas City Fed President Jeffrey Schmid said he believes monetary policy should be anti-inflation given the economy’s momentum. (Kent Nishimura/Bloomberg via Getty Images/Getty Images)
“To get up healthcare costs and insurance premiums are top of mind. The data shows that inflation is spreading across categories, both goods and services. Inflation has been above the Fed’s 2% target for more than four years,” he said.
The Kansas City Fed chairman said he believes monetary policy is “only modestly restrictive” at this stage. He noted that activity in the equity and credit markets suggests that policies are not particularly tight or restrictive.
Additionally, Schmid said consumption appeared to accelerate over the summer capital investment – especially in software and IT – has risen to historic highs, despite interest rate sensitivity.
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“With inflation still too high, monetary policy must lean against demand growth to expand supply space and ease price pressure in the economy,” Schmid said.
“With the dual mandate, Congress has directed the Federal Reserve to manage the tradeoffs arising from the economic constraints linking inflation and unemployment,” Schmid said. “Constraints lead to difficult decisions about how to balance competing objectives.”
The Fed’s dual mandate is to promote stable prices, in line with a long-term inflation target of 2% maximum employment. In recent months, risks to both objectives have come to light.
Inflation is trending upward, with the Consumer Price Index (CPI) showing inflation rose to 3% in September, the highest since January, while monthly jobs reports showed a marked slowdown in hiring over the summer.
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Schmid said that under certain circumstances the Fed’s actions could have disproportionate impacts on both sides of the economy double mandate.
As an example, he noted, “I don’t think a 25 basis point cut in the policy rate will do much to address the labor market tensions that are likely to result from structural changes in technology and demographics.”
“A cut, however, could have longer-lasting consequences for inflation if the Fed’s commitment to its 2% inflation target is called into question. Ultimately, inflation is the Federal Reserve’s responsibility and within its control, and as I balance the mandate — and the effectiveness of the Fed’s actions to meet that mandate — I favored keeping the policy rate stable,” Schmid said.
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