(Bloomberg) -- Federal Reserve Bank of Kansas City President Jeff Schmid sounded a warning about rising inflation expectations and concerns over economic growth, cautioning that the US central bank may soon confront both.
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“While the risks to inflation appear to be to the upside, discussions with contacts in my district, as well as some recent data, suggest that elevated uncertainty might weigh on growth,” Schmid said Thursday in prepared remarks for an event in Arlington, Virginia. “This presents the possibility that the Fed could have to balance inflation risks against growth concerns.”
The premonition comes amid increasing concern in markets that the Fed could face a scenario, known as stagflation, in which growth weakens at the same time that inflation remains elevated. Treasury yields tumbled in recent days amid trepidation that the Trump administration’s tariff policies could hurt economic output.
Schmid said that while he had been optimistic that inflation would continue to cool, heightened consumer inflation expectations in survey-based measures have led him to become more concerned about that progress.
“Certainly, survey measures of inflation expectations are imperfect and subject to noise, but with inflation just recently at a 40-year high, now is not the time to let down our guard,” Schmid said.
He said inflation has been firmer than he’d like and “sticky.” The Kansas City Fed chief said the labor market is strong and that the unemployment rate is close to many estimates of equilibrium.
In his speech, delivered at a US Department of Agriculture conference, Schmid also suggested that, given how much less volatile food prices are today than in the past, it might be appropriate to replace the much-watched core measure of inflation, which excludes both food and energy prices, with one that removes only energy.
Food Inflation
“Excluding food from core inflation can lead to communication challenges given the importance of food in the average household budget,” Schmid said. “While these communication challenges are not insurmountable, I might ask, in agricultural terms, is the juice worth the squeeze? I am not sure that it is.”
Schmid pointed to research from his bank showing that food prices are increasingly behaving like other prices, with less pass-through from commodity price moves and a higher reaction to other economic factors, including labor-market tightness.