Kansas City Fed President: The Federal Reserve may need to seek a balance between inflation risks and economic growth

According to the Zhitong Finance APP, Jeff Schmid, President of the Federal Reserve Bank of Kansas City, warned on Thursday that inflation expectations are rising, while economic growth faces uncertainty, which may force the Federal Reserve to seek a balance between inflation risks and concerns about economic growth.

"Although the current inflation risks tend to be upward, after communicating with businesses and economic contacts in my region, along with some recent data, I believe that high uncertainty may weigh on economic growth," Schmid said in a speech at a conference in Arlington, Virginia. "This means that the Federal Reserve may have to make trade-offs between controlling inflation and stabilizing growth."

Schmid's warning comes as market concerns about the Federal Reserve potentially facing "stagflation" are intensifying. Stagflation typically refers to a situation where economic growth slows while inflation remains high. Recently, U.S. Treasury yields have fallen sharply, with markets worried that the tariff policies of the Trump administration may undermine economic growth.

Although Schmid had previously been optimistic about the continued cooling of inflation, the rise in consumer inflation expectations has raised new concerns about the Federal Reserve's progress in combating inflation. He noted, "Admittedly, survey-based inflation expectation indicators are not perfect and are susceptible to noise, but considering that inflation has just experienced its highest point in 40 years, now is not the time to let our guard down."

Schmid stated that current inflation remains stickier than he would like and is "sticky." At the same time, he believes that the U.S. labor market remains robust, with the unemployment rate close to what many economists consider a balanced level.

At a meeting of the U.S. Department of Agriculture, Schmid also suggested that when measuring core inflation, it may be worth adjusting the calculation method to include food prices in the core inflation index while only excluding energy prices.

"Excluding food when measuring core inflation may lead to communication challenges, as food prices occupy a significant portion of the budgets of ordinary households," Schmid pointed out. "While these communication challenges can be overcome, in agricultural terms, 'Is this juice really worth the squeeze?' I am skeptical about that."

Schmid cited research from the Kansas City Fed indicating that food prices are becoming increasingly similar to other consumer goods prices, with their fluctuations no longer solely influenced by commodity prices but more driven by economic factors such as labor market tightness.

When discussing the Federal Reserve's balance sheet, Schmid reiterated his preference for continuing to reduce the size of the Federal Reserve's balance sheet to minimize its impact on financial markets. Currently, the Federal Reserve is reducing the size of its balance sheet through "quantitative tightening" (QT); however, some market participants believe this process may need to be paused or even stopped.

Schmid stated that the Federal Reserve's Discount Window—a lending tool that provides liquidity support to banks—could play an important role in this process. He noted that due to the relatively fragile trading environment in the interbank market, the Federal Reserve may need to use the Discount Window more aggressively to prevent liquidity tightening and further support the balance sheet reduction process. He added, "More aggressive use of the Discount Window can help guard against market liquidity crises and ultimately support the Federal Reserve's further balance sheet reduction ”