Fed hawks blast rate cut, say US inflation is too high

By Ann Saphir and Howard Schneider SAN FRANCISCO/WASHINGTON (Reuters) -Two regional Federal Reserve bank presidents on Friday aired their disagreement with the U.S. central bank's decision to cut interest rates this week, saying the labor market doesn't need the support and inflation is too high to warrant such a move. The strikingly frank remarks – from Dallas Fed President Lorie Logan and Kansas City Fed President Jeffrey Schmid – underscore discomfort within the central bank over the direction of policy and suggest a rising bar for another rate cut at its December 9-10 meeting, unless something changes dramatically in the economy. "I did not see a need to cut rates this week," Logan told a Dallas Fed banking conference. "And I'd find it difficult to cut rates again in December unless there is clear evidence that inflation will fall faster than expected or that the labor market will cool more rapidly." It's quite rare for a Fed policymaker to say so clearly and so far in advance of a rate-setting meeting what their rate-path preferences are. On Wednesday, after the central bank's policy-setting committee voted 10-2 to lower its benchmark interest rate to the 3.75%-4.00% range, Fed Chair Jerome Powell delivered his own unusually clear warning to markets: a December rate cut, he said, was "not a foregone conclusion, far from it."   Logan's remarks on Friday help show why. "The risks to the labor market do lie mainly to the downside," Logan said, nodding to the reason that Powell gave for this week's rate cut. She added that she has a close eye on recent layoff announcements and noted that a sudden drop in the stock market and a longer-than-expected government shutdown could pose risks to spending and economic activity. But "the remaining risks to employment are ones we can monitor closely and respond to if they are becoming more likely to materialize, not ones that currently warrant further preemptive action," Logan said. She added that inflation is too high and too slow to return to the Fed's 2% target. Logan is not a policy-voting member this year. FINANCIAL MARKETS STILL EXPECT RATE CUT IN DECEMBER Schmid, who does have a vote on the policy-setting committee this year and dissented on this week's move, explained on Friday in a written release that he, like Logan, feels the labor market is largely in balance. Any weakness, he said, is "more likely than not" due to structural changes in technology and demographics rather than slowing underlying demand. Judging from healthy consumer spending and business investment, the economy still has momentum, he said. "I do not think a 25-basis-point reduction in the policy rate will do much to address stress in the labor market," Schmid said. A cut, however, "could have a longer-lasting effect on inflation if the Fed's commitment to its 2% inflation target comes into question," he said. Fed Governor Stephen Miran also dissented this week, but in favor of a larger half-percentage-point cut.  Financial markets pared expectations on a rate cut in December after Powell signaled it could be in doubt, but are still betting two-to-one the central bank will cut rates by a quarter of a percentage point at its final meeting of the year. Even with the U.S. government shutdown and the lack of official economic data creating uncertainty about current conditions – one reason Powell gave for a possible pause in December – Logan said she feels she has visibility into the state of the economy. (Reporting by Ann Saphir and Howard Schneider; Editing by Chizu Nomiyama and Paul Simao)

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