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With Inflation Percolating, KC Fed Chief Cautions Against Cutting the Fed Interest Rate

By Chris Clayton

The president of the Kansas City Federal Reserve Bank is cautioning his fellow Fed bankers to continue to "be patient" before making any preemptive moves to lower interest rates.

It's more critical the Fed stick to its goal of bringing inflation rates back down to 2% levels. "We're going to push this inflation rate down," vowed Jeffrey Schmid, president of KC Fed, on Friday.

Schmid spoke to a group agricultural commodity investment leaders and regulators at the 2024 Agricultural Commodity Futures Conference "AgCon," led by the Commodity Futures Trading Commission and the Center for Risk Management Education Research at Kansas State University.

The KC Fed is the largest federal reserve bank in the country by geography and banks in the region are responsible for helping finance farmers in Midwest and Plains states.

Minutes released last week from the Fed's Federal Open Market Committee (FOMC) meeting from March show Fed bankers overall remain concerned about inflation. The next FOMC meeting is at the end of April.

FED HAS NOT ACHIEVED ITS GOAL

Inflation across the economy weighed heavily in Schmid's remarks to the agricultural group as he repeatedly noted the Fed has not yet achieved its goal of "returning inflation sustainably back to our 2% target."

The economy is pushing hard with demand for labor, while paying higher wages for those workers and still dealing with some supply chain challenges, Schmid said. All of that creates some uncertainty about what it will take for the Fed to "restore price stability," he said.

NOT TIME TO LOWER INTEREST RATE

Schmid's speech made the case to other Fed presidents that now is not the time to lower the Fed interest rate. He called for staying the course for now at the current rate level.

"With inflation running above target, economic growth continuing to show momentum, and elevated prices across a range of asset markets, the current stance of monetary policy is appropriate," Schmid said. "Therefore, rather than preemptively adjust the policy rate, I would prefer to be patient and wait for clear and convincing evidence that inflation is on track to hit our 2% target before adjusting the stance of policy."

Inflation has again pushed upward since the beginning of the year. The Consumer Price Index for March was up 3.5% from a year ago. Taking food and fuel out of the equation, other goods increased 3.8% in costs over the year.

"This recent data underscores what I believe is the need for the Federal Reserve to be patient as we wait for clear and convincing evidence that inflation is on track to sustainably return to 2%," Schmid said.

LABOR PRESSURES

Schmid reiterated the point multiple times. With higher inflation and tight labor, "it is appropriate that monetary policy remain restrictive."

Schmid stressed the labor supply and job market will continue creating multiple headwinds in trying to bring down inflation levels. Businesses are simply looking for more workers.

Demand for labor remains strong as "evidenced by robust hiring and elevated wage growth." So far this year, companies are adding an average of 270,000 a month, "far above the historic norm," Schmid noted.

While wage growth has moderated from its recent peak, it remains elevated compared to early periods and likely is continuing to put upward pressure on prices of services. "Inflation will continue to be challenged in the cost of labor and just the size of our labor force."

RISING PRICES FOR RENT, HOUSING

The tight labor market and the resulting wage increases are pushing up prices not just for everyday items, but also for housing, "an important contributor to the current strength of overall inflation, Schmid said. Rent inflation peaked in 2022, but rent inflation "remains well above its pre-pandemic rate."

"Research by staff at the Kansas City Fed suggests that the ongoing tightness in the labor market could keep rent inflation elevated for some time," Schmid said. "Job gains and wage increases put upward pressure on rents and housing prices as income growth increases household demand for additional and higher-quality living spaces."

The labor market will remain tight even as immigration has rebounded in the past year and there are more women ages 25-50 entering the labor force, Schmid said. Still, there is a lot of uncertainty over whether increases in the labor supply will rebalance with less demand for labor.

"While I welcome the significant growth witnessed in the economy's workforce last year, it remains unclear whether this rapid pace of supply improvement will continue going forward," Schmid said.

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