KC Fed Insights to Ag Leaders 04/13 21:28

   With Inflation Percolating, KC Fed Chief Cautions Against Cutting the Fed 
Interest Rate

   The tight labor market and its impact on inflation are driving reasons the 
president of the Kansas City Federal Reserve explained to a group of 
agricultural leaders that it is better for the Fed to hold steady on interest 
rates rather than make a move to lower them.

Chris Clayton
DTN Ag Policy Editor

   OVERLAND PARK, Kan. (DTN) -- The president of the Kansas City Federal 
Reserve Bank is cautioning his fellow Fed bankers to continue to "be patient" 
before making any preemptive moves to lower interest rates.

   It's more critical the Fed stick to its goal of bringing inflation rates 
back down to 2% levels. "We're going to push this inflation rate down," vowed 
Jeffrey Schmid, president of KC Fed, on Friday.

   Schmid spoke to a group agricultural commodity investment leaders and 
regulators at the 2024 Agricultural Commodity Futures Conference "AgCon," led 
by the Commodity Futures Trading Commission and the Center for Risk Management 
Education Research at Kansas State University.

   The KC Fed is the largest federal reserve bank in the country by geography 
and banks in the region are responsible for helping finance farmers in Midwest 
and Plains states.

   Minutes released last week from the Fed's Federal Open Market Committee 
(FOMC) meeting from March show Fed bankers overall remain concerned about 
inflation. The next FOMC meeting is at the end of April.

   FED HAS NOT ACHIEVED ITS GOAL

   Inflation across the economy weighed heavily in Schmid's remarks to the 
agricultural group as he repeatedly noted the Fed has not yet achieved its goal 
of "returning inflation sustainably back to our 2% target."

   The economy is pushing hard with demand for labor, while paying higher wages 
for those workers and still dealing with some supply chain challenges, Schmid 
said. All of that creates some uncertainty about what it will take for the Fed 
to "restore price stability," he said.

   NOT TIME TO LOWER INTEREST RATE

   Schmid's speech made the case to other Fed presidents that now is not the 
time to lower the Fed interest rate. He called for staying the course for now 
at the current rate level.

   "With inflation running above target, economic growth continuing to show 
momentum, and elevated prices across a range of asset markets, the current 
stance of monetary policy is appropriate," Schmid said. "Therefore, rather than 
preemptively adjust the policy rate, I would prefer to be patient and wait for 
clear and convincing evidence that inflation is on track to hit our 2% target 
before adjusting the stance of policy."

   Inflation has again pushed upward since the beginning of the year. The 
Consumer Price Index for March was up 3.5% from a year ago. Taking food and 
fuel out of the equation, other goods increased 3.8% in costs over the year.

   "This recent data underscores what I believe is the need for the Federal 
Reserve to be patient as we wait for clear and convincing evidence that 
inflation is on track to sustainably return to 2%," Schmid said.

   LABOR PRESSURES

   Schmid reiterated the point multiple times. With higher inflation and tight 
labor, "it is appropriate that monetary policy remain restrictive."

   Schmid stressed the labor supply and job market will continue creating 
multiple headwinds in trying to bring down inflation levels. Businesses are 
simply looking for more workers.

   Demand for labor remains strong as "evidenced by robust hiring and elevated 
wage growth." So far this year, companies are adding an average of 270,000 a 
month, "far above the historic norm," Schmid noted.

   While wage growth has moderated from its recent peak, it remains elevated 
compared to early periods and likely is continuing to put upward pressure on 
prices of services. "Inflation will continue to be challenged in the cost of 
labor and just the size of our labor force."

   RISING PRICES FOR RENT, HOUSING

   The tight labor market and the resulting wage increases are pushing up 
prices not just for everyday items, but also for housing, "an important 
contributor to the current strength of overall inflation, Schmid said. Rent 
inflation peaked in 2022, but rent inflation "remains well above its 
pre-pandemic rate."

   "Research by staff at the Kansas City Fed suggests that the ongoing 
tightness in the labor market could keep rent inflation elevated for some 
time," Schmid said. "Job gains and wage increases put upward pressure on rents 
and housing prices as income growth increases household demand for additional 
and higher-quality living spaces."

   The labor market will remain tight even as immigration has rebounded in the 
past year and there are more women ages 25-50 entering the labor force, Schmid 
said. Still, there is a lot of uncertainty over whether increases in the labor 
supply will rebalance with less demand for labor.

   "While I welcome the significant growth witnessed in the economy's workforce 
last year, it remains unclear whether this rapid pace of supply improvement 
will continue going forward," Schmid said.

   DEMAND HIGH FOR GOODS

   Supply chains remain another area of concern. American consumers continue to 
power the economy with their spending and demand for goods. Even though the 
supply chain challenges have eased since 2022, Schmid said there is more upside 
risk to prices for goods because of "recent disruptions to global shipping." 
Along with that, "Relatedly, energy prices are also up significantly since the 
beginning of the year, which poses an additional headwind to sustainably low 
and stable inflation," Schmid said.

   AG ECONOMY

   Looking at the farm economy, Schmid noted farm incomes will "remain above 
their pre-pandemic levels," even though farm income is again forecast to fall 
this year.

   "While higher interest expenses and reduced incomes may be weighing on some 
highly leveraged producers, the overall financial picture in agriculture 
remains strong," he said.

   Most agricultural lenders continue to report that credit quality also 
remains strong while, "loan delinquencies are still historically low, and 
profits of recent years continue to support strong balance sheets."

   Higher interests during the past two years also have not brought down 
farmland values, while there remains "relatively strong global demand for 
agricultural products."

   ON FED MOVES

   Schmid added the economy has largely adjusted to the Federal Reserve moves 
over the past three years to push up the Fed borrowing rate 5% in that time.

   "I've been surprised at how well the economy has adjusted to a 500-basis 
point increase," he said, adding "Maybe there's a little too much chatter about 
interest rates at this point."

   Also see, "Data, Markets and NASS Reports: Producers, Others Raise Concerns 
Over NASS Dropping Midyear Cattle Report," 
https://www.dtnpf.com/agriculture/web/ag/news/business-inputs/article/2024/04/12
/producers-others-raise-concerns-nass

   Chris Clayton can be reached at Chris.Clayton@dtn.com

   Follow him on social platform X @ChrisClaytonDTN




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