Jeffrey Schmid, President of the Federal Reserve Bank of Kansas City, said it is appropriate to keep monetary policy restrictive with inflation near 3%. He said inflation at this level suggests demand remains strong and is outpacing growth in supply.<\/p>\n
He said further interest rate cuts could allow higher inflation to last for longer. He also said he is not seeing evidence that the current level of interest rates is restraining the economy.<\/p>\n
Schmid said productivity gains could allow faster economic growth without raising inflation, but said conditions are not yet at that point. He said recent productivity improvements may partly reflect workers staying in jobs longer, rather than coming only from technology.<\/p>\n
He said there are opportunities to reduce demand for bank reserves, which could allow a smaller Federal Reserve balance sheet. He said price shocks are \u201ctransitory\u201d depending on the central bank\u2019s response, and that the Fed should keep its focus on the 2% inflation target.<\/p>\n
With inflation still proving stubborn, as seen in the January 2026 Core CPI reading of 2.9%, the case for keeping a restrictive policy is strengthening. We believe this indicates that any further rate cuts could be delayed, challenging market expectations. This environment suggests demand is still outpacing the improvements we saw in supply chains throughout 2025.<\/p>\n
The idea that current interest rates are not significantly restraining the economy is backed by recent data. For instance, the economy added over 250,000 jobs in January 2026, a figure that shows underlying strength. This makes it difficult for the central bank to justify easing policy when the labor market remains so robust.<\/p>\n
Derivative traders should consider that the market may be pricing in too many rate cuts for 2026. The CME FedWatch tool indicates expectations for three or four cuts this year, which now seems overly optimistic. We are looking at positions that would benefit from fewer cuts, such as selling SOFR futures for the second half of the year.<\/p>\n
This mismatch between Fed commentary and market pricing is likely to increase bond market volatility. Historically, such divergence leads to choppy conditions, as we saw in late 2025 when similar uncertainty arose. We think buying options on interest rate volatility, through instruments tracking the MOVE index, could be a prudent way to position for this.<\/p>\n
A “higher for longer” rate environment also has implications for the yield curve and stocks. We anticipate renewed pressure for the yield curve to flatten, making trades on the spread between 2-year and 10-year Treasury futures attractive. For equities, this could act as a headwind for growth sectors, suggesting protective put options on tech-focused indices might be warranted.<\/p>\n
Create your live VT Markets account<\/a>\u00a0and\u00a0start trading<\/a>\u00a0now. <\/b><\/p>\n","protected":false},"excerpt":{"rendered":" Kansas City Fed\u2019s Schmid urges restrictive policy as inflation stays near 3%, warns rate cuts may prolong pressures.<\/p>\n","protected":false},"author":62,"featured_media":17028,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59],"tags":[],"class_list":["post-41613","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-live-updates"],"acf":{"acf_article_selection_author":null},"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts\/41613","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/users\/62"}],"replies":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/comments?post=41613"}],"version-history":[{"count":0,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts\/41613\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/media\/17028"}],"wp:attachment":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/media?parent=41613"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/categories?post=41613"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/tags?post=41613"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}