By Jessica Coacci
Kansas City Fed President Jeff Schmid said the Fed does not have room to be complacent with inflation.
Schmid said that although economic growth remains solid, both sides of the Fed's dual mandate--labor and inflation--present some challenges, according to prepared text of his remarks at the Metro Denver Executive Club in Denver Tuesday.
"Though I believe our credibility on inflation remains intact, I don't think we can be complacent, and the costs of losing that credibility are high," he said. Inflation has been above the Fed's objective for nearly five years.
Schmid said higher goods prices, partly on account of tariffs, are part of the story but not all of it. He said the inflation rate for services is also running strong and faster than what isconsistent with the Fed returning to its 2% inflation objective.
Schmid, one of the three dissenters to the Federal Reserve's December quarter-point rate cut decision last year, discussed the impact of the different supply and demand factors on the economy, such as the aging population, population growth and artificial intelligence.
Schmid argued that growth led by increased supply, perhaps on account of AI-led advances in productivity, can boost output and lower inflation. In contrast, demand-led growth, such as increased healthcare spending related to an aging population, can increase output but often at the cost of higher inflation.
With inflation above the Fed's 2% target, Schmid said it appears demand is outpacing supply across much of the economy. However, he remains open to the possibility that AI and other innovations will eventually lead to a noninflationary, supply-driven growth cycle.
"AI might be necessary to offset the drain on growth from a smaller workforce," he noted. "However, based on the current rate of inflation, we are not there yet."
Write to Jessica Coacci at jessica.coacci@wsj.com
(END) Dow Jones Newswires
03-03-26 1037ET
