Kansas City Fed president Jeff Schmid said Thursday that he has grown more cautious about the downward path of inflation as consumer expectations for future price increases surge.
"With inflation just recently at a 40-year high, now is not the time to let down our guard," Schmid said in a speech at the US Department of Agriculture’s conference in Arlington, Va.
"It could be argued that some of the factors driving up inflation expectations are likely one-off transitory developments, but again given recent experience, I am not willing to take any chances."
His comments came after a new survey from the Conference Board showed that consumer confidence notching its biggest monthly decline in nearly four years, and inflation expectations for the year ahead jumped to 6% from 5.2% amid higher egg prices and concerns about tariffs from the new Trump administration.
Schmid said discussions with contacts in his district, as well as some recent data, suggest that uncertainty might weigh on growth.
"This presents the possibility that the Fed could have to balance inflation risks against growth concerns,” he said.
The latest reading from the Fed's preferred inflation target, the "core" Personal Consumption Expenditures (PCE) Index, is due out Friday.
A hotter-than-expected inflation reading for January from a separate gauge, Consumer Price Index (CPI), made it much more likely that the Fed will keep rates on hold for the foreseeable future.
The Fed is expected to hold rates steady at its policy meeting on March 18-19 for the second time this year after cutting rates by 100 basis points for three consecutive meetings last fall.
Schmid on Thursday pointed to lessons from the 1970s and 1980s where he said that lowering rates in response to softening data before inflation is beat can allow inflation to gain a hold in expectations and the price-setting process.
He also warned that once inflation is embedded in expectations it becomes much more painful to overcome.
Schmid also said he "might prefer" replacing the current core inflation with a measure of inflation excluding only energy prices because he doesn’t believe food prices are that volatile and they are part of household’s daily expenditures.
Richmond Fed president Tom Barkin also warned this week about lessons from the 1970s.
Barkin said he wants to keep interest rates "modestly restrictive" until he gains more confidence inflation is returning to the central bank's 2% goal.
"It is critical that we remain steadfast," said Barkin. "We learned in the '70s that if you back off inflation too soon, you can allow it to reemerge. No one wants to pay that price."
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