President of KC Federal Reserve Bank has his eye on inflation

After a Grand Island Economic Forum on Thursday, DJ Eihusen said he and other directors of the Fed's Omaha branch would be touring the Nebraska State Fair grounds.

"It feels like a State Fair day," said Eihusen, president, CEO and chairman of Chief Industries. "It's going to be really hot, and we're going to sweat it out."

But the literal temperature in Grand Island wasn't the only thing on the rise.

"Inflation's too hot, and it's been over target for too long," said Jeff Schmid, president and CEO of the Federal Reserve Bank of Kansas City. "As such, my focus remains on inflation and setting the correct course for policy."

The Federal Reserve Bank of Kansas City's Omaha Branch hosted the luncheon event at the Bosselman Conference Center while its board was in town for meetings and tours.

Schmid said the Fed's congressional mandate covers two areas — price stability and full employment.

"It really is keeping prices at or below a 2% threshold and making sure that the employment economy is robust," he said of his job. "The unemployment rate in Nebraska, as we all know, tends to be relatively low and stands at about 3%, below the national rate, which is around 4.2%."

Although Schmid said, "Overall, the economy in Nebraska appears very solid," the state is not without some challenges.

"Notably, the plant closure in Lexington has put a significant dent in the state's manufacturing employment," he said. "In the agricultural sector, profit margins are thin among row-crop producers due to a combination of low prices and high input costs." Cattle prices are at all-time highs, he said. Drought has made it expensive to maintain herds, contributing to "a record-low U.S. cattle stock."

"In Nebraska, inflation and price pressures remain key concerns," Schmid said.

On a positive note, real gross domestic product — the total value of goods and services produced in the state — increased about 2.5% over the past year, about the same pace as the country as a whole.

"The Fed aims to keep inflation at a pace such that it can be safely ignored," Schmid said, "and that's why the 2% seems to make sense as we think about managing the economy."

Oil prices both pushed up inflation in recent months and caused a drop-off in June, he said, but inflation isn't all about energy prices.

"Excluding energy, inflation is still running solidly above 2%," he said. "On inflation, we are still not where we want to be.

"Food price inflation has been creeping up and is currently running about 2.5%, a good bit faster than the pre-pandemic average," Schmid said. "Beef prices have stood out with double-digit price increases over the previous 12 months."

The textbooks say that inflation caused by temporary "supply shock" should be ignored, he said. Tightening monetary policy could come too late or be counterproductive.

"One of the enduring lessons of the pandemic is that inflation is never just an issue of supply alone. Strong demand is always a factor as well," Schmid said. "Forecasts suggest that beef consumption in 2026 will still be 10 percent above its 20-year average."

Not all is gloom and doom, however.

"Most economic indicators suggest continued steady growth over the past year. GDP has increased 2.75%, about in line with the average pace of the last couple decades," he said. "The most recent data for June had the unemployment rate at 4.2 percent, about in line with what most economists estimate is consistent with a labor market that is neither too tight nor too loose."

More than once, Schmid used the word "resilient" to describe employment levels.

"My primary concern continues to be inflation and has been for the better part of the three years I've occupied this office," he said.

Schmid compared economic policy to a locomotive riding on two tracks, which are inflation and employment.

"There's a naturalness to trying to run the economy as fast and as hot as possible, because that tends to grow the pie larger, which provides more opportunity to get a little better slice of that pie," he said. "My job is to try to keep a balance on those rails.

"If the train runs too fast or if it runs on uneven tracks, it has the risk of derailing, which could be a recession. It could be hyperinflation," Schmid said. "Those are the consequences for not trying to keep equilibrium on those rails."