Jeffrey Schmid, President of the Federal Reserve Bank of Kansas City and not a voting member of the Federal Open Market Committee (FOMC) in 2026, delivered hawkish remarks Tuesday evening at the Kansas City Fed's Agricultural Economic Summit in Omaha, Nebraska, offering his personal views following last week's FOMC meeting in Washington.
Schmid's inflation warning cut straight through any comfort from the June inflation has been too high for too long, and it would be premature to lean on a single encouraging print given the broader trend.
Stripping out energy, inflation ran at 3.2 percent over the past 12 months, about half a percentage point above where it stood a year earlier — evidence, he said, of a broad-based problem that goes well beyond volatile oil prices. And with oil climbing again, he flagged real uncertainty over how much relief energy prices will keep offering.
Turning to the AI buildout, Schmid pointed to it as a genuine driver of inflation, pushing up prices for chips, hardware, and construction — but he pushed back on treating that as a reason for the Fed to look away, arguing policymakers should stay focused on aggregate price gauges like the PCE index rather than chasing relative price shifts beneath the surface.
On the labor market, he described conditions as roughly in balance: unemployment at 4.2 percent in June, with job growth of just 500,000 over the past year — a slow pace, but one he said tracks a labor force that is barely expanding rather than any underlying weakness.
Growth, too, held up despite trade and energy disruptions, with a second-quarter dip driven mainly by swings in trade and inventories while consumption and investment stayed strong.
Schmid drew a direct line back to his own district, where row-crop producers face persistent cost pressure and thin margins even as record cattle prices — fueled by beef demand running nearly 10 percent above its 20-year average — deliver outsized gains elsewhere in agriculture; lenders, he said, now describe an environment that's grown markedly more complex and uncertain. Taken together, he does not see current policy as restrictive, and getting inflation back to the Fed's 2 percent target, in his view, will require tighter policy.
Key Quotes:
Inflation
Inflation has been too high for too long.
Though the most recent inflation data for June showed an encouraging deceleration, it would be premature to put too much weight on a single data point relative to recent trends.
With the price of oil once again rising, it is uncertain how persistent any relief on energy will be.
Measures of inflation that exclude energy are still running solidly above 2 percent, revealing an underlying trend in the data.
Inflation excluding energy has run above the monthly pace needed to reach the inflation target in the six months before June.
Over the previous 12 months, inflation ex-energy was 3.2 percent, about ½ percentage point higher than where it stood in June of last year.
Inflation has been too high across a broad-based and growing cross-section of goods and services.
Inflation is always the result of both supply and demand, and the balance between the two.
Uncomfortable ever assuming that a burst of inflation will be temporary.
How persistent a spike in inflation is ultimately depends importantly on how the Fed reacts or is expected to react.
Inflation is too high.
AI & Productivity
Another factor contributing to inflation has been the pace of the current AI buildout, which has increased prices for chips and computer hardware, building materials, and construction more generally.
These higher prices reflect an increase in the relative demand for investment in AI infrastructure.
Monetary policy works best when policymakers remain focused on aggregate price indexes and largely ignore the distribution of relative price changes occurring beneath the surface.
An aggregate price index, such as the PCE index, is the best measure of purchasing power and should be the target of Fed policy.
Labor Market
The labor market appears to be roughly in balance.
The most recent data for June had the unemployment rate at 4.2 percent, about in line with a labor market that is neither too tight nor too loose.
The recent pace of job gains has been on the low side, with the economy adding only 500,000 net new jobs over the past year, but this is not surprising against the backdrop of a labor force that is barely growing.
Growth & Economy
Despite elevated uncertainty and some notable disruptions to global trade and energy markets, most economic indicators suggest continued steady growth.
Although overall growth dipped a bit in the second quarter, this was mostly due to swings in trade and inventories as underlying consumption and investment remained very strong.
The economy appears to be performing well with the notable exception of inflation.
Monetary Policy
Do not see the current stance of monetary policy as restrictive.
Bringing inflation down to the Fed's 2 percent objective will require tighter policy.
Given that price stability is the Fed's responsibility and within the Fed's control, this is worrisome.
Agriculture & Regional Economy
Some parts of the industry are facing significant pressure, even as conditions in other segments are extremely positive.
Among producers of row crops, a combination of low prices and persistent cost pressures have continued to limit profit opportunities and raise questions about the longer-term trajectory for farm operations and broader supply chains.
A record-setting increase in cattle prices over the past few years, supported by resilient consumer demand for beef, has positioned operations in that industry for significant gains.
Lenders describe an environment that has become increasingly complex and uncertain.
Some borrowers may be considering selling their farm or even filing for bankruptcy because of ongoing economic pressure.
The market for farm real estate appears nearly as strong as ever, and productivity gains continue to lead to expanded production of food and agricultural products.
Structural changes are gradually reshaping the industry, with important implications for monetary policy.