The Federal Reserve cut interest rates for the second time in 2025 last week, though one member of the central bank’s monetary policy committee voted against cutting rates, citing concerns over inflation.
Policymakers on the Federal Open Market Committee (FOMC), which guides the Fed’s monetary policy, voted 10-2 in favor of lowering the benchmark federal 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 50-basis-point cut.
The other dissenter was Federal Reserve Bank of Kansas City President Jeffrey Schmid, who said in a dissent statement that his “preference would have been to leave the target range unchanged” because the labor market is “largely in balance, the economy shows continued momentum, and inflation remains too high.”
Schmid said that in his conversations with contacts in the Kansas City Fed’s district he has heard “widespread concern over continued cost increases and inflation.”
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“Rising healthcare costs and insurance premiums are top of mind. In the data, inflation is spreading across categories, both goods and services. Inflation has been running above the Fed’s 2% objective for more than four years,” he said.
The Kansas City Fed chief said he thinks that monetary policy is “only modestly restrictive” at this stage, noting that activity in equity and lending markets suggests that policy isn’t particularly tight or restrictive.
Furthermore, Schmid said that consumption appeared to accelerate through the summer, while capital investment – particularly in software and IT – has surged to historic highs despite being sensitive to interest rates.
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“With inflation still too high, monetary policy should lean against demand growth to allow the space for supply to expand and relieve price pressures in the economy,” Schmid said.
“With the dual mandate, Congress has directed the Federal Reserve to manage the trade-offs that arise from the economy-wide constraint that ties inflation to unemployment,” Schmid said. “Constraints lead to difficult decisions over how to balance competing objectives.”
The Fed’s dual mandate is to promote stable prices in line with a long-run 2% inflation target as well as maximum employment. Risks to both of the goals have emerged in recent months.
Inflation has trended higher, with the consumer price index (CPI) showing inflation rose to 3% in September in what was the highest reading since January, while monthly jobs reports showed a marked slowdown in hiring over the summer.
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Schmid said that in some circumstances the Fed’s actions could have disproportionate effects on both sides of the dual mandate.
He noted as an example that “I do not think a 25-basis-point reduction in the policy rate will do much to address stresses in the labor market that more likely than not arise from structural changes in technology and demographics.”
“However, a cut could have longer-lasting effects on inflation if the Fed’s commitment to its 2% inflation objective comes into question. In the end, 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 in meeting that mandate – my preference was to hold the policy rate steady,” Schmid said.
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