Fed's Schmid says high inflation still bigger issue facing central bank

By Michael S. Derby

NEW YORK, Feb 25 (Reuters) - Federal Reserve Bank of Kansas City President Jeffrey Schmid said on Wednesday that overly high inflation remains a key ?problem the central bank needs to ?address, but he stopped short of saying how monetary policy should respond.

"I ?think we have work to do on the inflation side ?of things," while "I think we're in a ?pretty good ?place for employment," Schmid said in an appearance before the Economic Club of ?Colorado.

The bank president did not, ?however, say how that mix of factors is influencing his outlook for monetary policy. Schmid ?was a skeptic of the ?Fed's push ?to lower the cost of short-term borrowing last year that saw officials lower their target rate range ?to between 3.5% to 3.75%.

Markets expect more Fed rate ?cuts this year but officials have offered little guidance, with many watching for evidence that inflation is moving down toward the Fed's 2% target.

The Fed's rate cuts last ?year ?sought to bolster a softening job market while ?retaining enough policy restraint to keep inflation moving down.

Schmid ?also addressed the Fed's balance sheet and said internal debates focus on understanding the right level of reserves for the financial system.

He noted that the Fed's still-large holdings of mortgage bonds from past buying efforts were holding down home borrowing costs. Mortgage ?rates are "probably 75 to 100 basis points lower today than they would otherwise be" due to the current size of ?Fed mortgage bond holdings, ?he said.

(Reporting by Michael S. Derby; Editing ?by David Gregorio)