Smith Warns: Keep Fed Rate Policy Restrictive; Premature Rate Cuts Could Protract Inflation

Fed Kansas City President Jeff Smith warned on February 11, 2026, that with inflation above target and economic growth strong, the Federal Reserve should maintain a "moderately restrictive" stance. Premature rate cuts could extend inflation, as demand remains above supply. In a speech in New Mexico, Smith noted inflationary pressures have not fully abated despite tight monetary policy. While higher rates should temper activity, he saw limited effectiveness in a growth-driven, pricing environment. He supported the Fed's decision to keep rates unchanged in December 2025, when the federal funds rate remains between 3.5% and 3.75%, near its neutral level. Smith cautioned against assuming AI-driven productivity gains will soon offset inflation. Recent productivity gains may reflect lower labor turnover and longer tenures rather than structural improvements. The labor market's "low hiring, low unemployment, low turnover" could temporarily boost efficiency but may not translate to long-term productivity gains. He also highlighted that the January nonfarm payrolls report surprised on both sides, with the unemployment rate unexpectedly falling, reinforcing the Fed's stance for at least the next two meetings. Markets are closely watching upcoming inflation data before any rate decisions in June 2026.