Jeffrey Schmid, President of the Federal Reserve Bank of Kansas City, said the Federal Reserve has several layers of independence. Speaking at the Economic Club of Colorado, he said politics do not affect policy talks. He also said independence leads to better decisions. He described Jerome Powell as a patriot who focuses on what is best for the country. He said each Fed chair runs the Federal Open Market Committee (FOMC) in their own way, and that last year’s FOMC dissents were made with care.

Inflation Still Not Conquered

Schmid said the Fed will not go back to the balance sheet size it had before the financial crisis. He said the key balance sheet question is the level of reserves. He also raised concerns about how long the balance sheet will stay large. He said the Fed’s mortgage holdings have pushed down mortgage-market yields. He added that it will take years for the Fed to reduce its mortgage bond holdings. By contrast, Treasury bill buying for reserve management is fairly small. Schmid said the Fed still has more work to do on inflation, which is part of its mandate. He said the job market is in a pretty good place. He added that the Fed watches markets, but is not focused on them. Schmid said any Fed response to market stress would depend on what caused it. He also said he values the experience Kevin Warsh would bring if confirmed as Fed chair.

Trading Implications For A Higher Rate Path

Inflation still needs more work, and traders should take that seriously. The latest CPI reading for January was a sticky 2.9%. This shows the last step toward the 2% target is still hard. As a result, options markets may need to price in “higher for longer” rates, since the timing of rate cuts is unclear. The job market is still in good shape, which gives the Fed room to hold its current stance. With unemployment at 4.1% and last month’s payrolls rising by a solid 190,000 jobs, there is little need to ease policy to support employment. Traders should be careful about betting on rate cuts based on small signs of labor-market weakness. Schmid said the Fed is not going back to the pre-crisis balance sheet, so the main debate is the level of reserves. The Fed’s holdings are still just above $6 trillion, and the runoff of mortgage bonds will take years, as expected back in 2025. This creates a steady, long-term tightening effect that may keep mild pressure on long-duration assets. The Fed is attentive to markets, but not preoccupied by them. This means volatility trades—such as buying VIX call options or using straddles—could work if market swings rise. The Fed is less likely to step in to calm volatility unless it threatens the broader financial system. This is very different from the post-2020 period, a shift the market began to fully price in around the middle of last year. Schmid’s focus on independence from politics suggests traders should follow the data, not political noise. This supports strategies built around key releases like inflation and jobs reports. Trading on the idea that political pressure will force a policy change is likely to lose money. Create your live VT Markets account and start trading now.

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