Fed's Schmid: How much more interest rates can fall remains uncertain, large fiscal deficits could mean higher interest rates

"The decision to cut rates is a nod to growing confidence that inflation is on track to reach the Fed's 2 percent target -- confidence based in part on signs in recent months that both the labor and product markets are balancing," Kansas Fed President Schmid said in prepared remarks to the Omaha Chamber of Commerce. He said that while progress back toward the 2 percent target means now is an appropriate time to cut rates, "it remains to be seen how much further or ultimately to what extent interest rates will fall." On the immediate issue of federal government spending, Schmid said large fiscal deficits will not trigger inflation because the Fed will fulfill its mandate to keep inflation at its stated 2 percent target. However, that could mean "persistently high interest rates," Schmid said, which is why the Federal Reserve must maintain its independence in setting monetary policy.