Kansas City Fed President: The Federal Reserve may need to find a balance between inflation risk and economic growth.

Jeff Schmid, President of the Federal Reserve Bank of Kansas City, warned on Thursday that inflation expectations are rising and economic growth faces uncertainty, which could force the Federal Reserve to seek a balance between inflation risks and concerns over economic growth. "While the current inflation risks tend to be on the upside, after discussions with businesses and economic contacts in my region, coupled with some recent data, I believe high uncertainty could drag on economic growth," Schmid said in a speech at a meeting in Arlington, Virginia. "This means that the Federal Reserve may have to strike a balance between controlling inflation and stabilizing growth." Schmid's warning comes at a time when the market is growing increasingly concerned about the Federal Reserve potentially facing "stagflation." Stagflation typically refers to a situation where economic growth slows down while inflation remains high. Recently, US Treasury yields have dropped significantly, raising concerns in the market that Trump administration's tariff policies could weaken economic growth. Although Schmid had previously been optimistic about cooling inflation, the rise in consumer inflation expectations has led him to have new concerns about the Federal Reserve's progress in fighting inflation. He noted, "Certainly, survey-based measures of inflation expectations are not perfect and are susceptible to noise, but considering that inflation has just experienced its highest level in 40 years, now is not the time to let our guard down." Schmid stated that current inflation is still more stubborn than he would hope for, and has a strong "stickiness." At the same time, he believes that the US labor market remains robust, with the unemployment rate close to what many economists consider to be the equilibrium level. At a meeting at the US Department of Agriculture, Schmid also suggested that in measuring core inflation, perhaps an adjustment in calculation method could be made to include food prices in the core inflation index, while only excluding energy prices. "Excluding food when measuring core inflation may pose communication challenges, as food prices do occupy an important place in the budget of ordinary households," Schmid noted. "While these communication challenges can be overcome, in agricultural terms, 'is this juice worth the squeeze?' I am skeptical." Schmid cited research from the Kansas City Fed indicating that food prices are becoming more like prices of other consumer goods, their fluctuations no longer solely driven by commodity prices but more by economic factors such as tight labor market conditions. Discussing the Federal Reserve's balance sheet, Schmid reiterated his preference to continue reducing the size of the Federal Reserve's balance sheet to minimize the Fed's influence on financial markets. Currently, the Fed is reducing the size of its balance sheet through quantitative tightening (QT), however, some market participants believe that this process may need to pause or stop. Schmid stated that the Federal Reserve's discount window - a lending tool that provides liquidity support to banks - can play a crucial role in this process. He pointed out that due to the relatively fragile trading environment in the interbank market, the Federal Reserve may need to more actively use the discount window to prevent liquidity crunch and further support the balance sheet reduction process. He added, "More actively using the discount window can help prevent market liquidity crises and ultimately support further balance sheet reduction by the Federal Reserve."