Fed Comments
Kansas City Fed President Jeffrey Schmid was on CNBC this morning explaining why he dissented on Wednesday — he didn’t want the 25bp cut. And based on how he framed things, if a cut is proposed in December, he’ll likely dissent again.
Schmid’s read on inflation is overstated. He called Core at 3%. But Core PCE is 2.9% — and Powell even suggested Wednesday that the unreleased data would have printed closer to 2.8%.
Importantly — Schmid is ignoring what Powell himself has repeatedly acknowledged: tariffs alone are temporarily adding ~0.3% – 0.4% to inflation, and shelter + portfolio management are still overstating inflation as well.
When you strip out those distortions, “real” Core PCE is effectively right at 2% YoY.
He also argues the labor market is “in balance.” That’s just not what the data is showing. BLS has been weak, ADP has shown job losses in 3 of the last 4 months, and June payrolls from BLS were outright negative. Yes — immigration increased labor supply — but if hiring slows and layoffs broaden, supply doesn’t matter because it’s not being absorbed. And major companies — like Amazon and Microsoft — have announced layoffs recently.
Schmid claims policy isn’t restrictive because stocks are at all-time highs and CapEx is strong. But that misses the point — AI is doing the heavy lifting there. AI is the catalyst — not Fed policy. We’ve seen hundreds of billions in AI capital commitments in just the last 48 hours — NVIDIA, Meta, and more. And even here in our own industry, mortgage companies are investing heavily in AI.
A 25bp difference in the Fed Funds Rate is not going to make or break that spend. If you don’t invest in AI, you fall behind. It’s existential — not marginal.
Schmid votes again one more time on December 10 — and odds are he’ll vote against another cut.
Dallas Fed President Lorie Logan, who votes next year, also leaned hawkish. She said it’s hard to support another cut in December, arguing the downside labor risk has already been addressed with the cuts we’ve already gotten — and that the outlook doesn’t call for more. She believes the labor market is balanced as well — which, as we laid out above, we disagree with.
She also says inflation is still too high and taking too long to reach target.
But here’s the bigger overlay:
if the government shutdown continues and the Fed doesn’t get the data they need ahead of December 10 — they are not going to cut blind.
And starting tomorrow — SNAP benefits begin to run out. 42 million Americans will lose at least some of their food assistance. That is going to create noise — calls to Congress — and potentially enough political pressure to end the shutdown faster.
Bottom line for rates:
the macro data backdrop is more dovish than Schmid and Logan are portraying — but if the Fed doesn’t have fresh data in hand by December — process alone could keep the December cut off the table.