Jeff Schmid, president of the Federal Reserve Bank of Kansas City, cautioned on Tuesday that the Federal Reserve should be vigilant about inflationary pressure stemming from higher energy prices tied to the Iran conflict.
In prepared remarks for an event in Oklahoma City, Schmid emphasized the persistence of inflation and the additional pressure that a rise in oil prices could impose. "This oil shock comes at a time when inflation already has been too high for too long," he said. "With inflation already running hot, now is not the time to assume that the inflation from higher oil prices will be transitory."
Schmid detailed how the jump in oil and gas prices could feed through to core inflation, noting specific transmission channels. He pointed to items such as airfares and other transportation costs as likely vectors for higher energy costs to reach broader measures of core inflation.
The Kansas City Fed chief reiterated his concern over longer-term inflation dynamics, saying that prices have been rising faster than the Fed's 2% goal for five years and that he is concerned inflation will remain closer to 3%.
On the state of the economy, Schmid said growth and consumption remain strong even as hiring has been low. He expected the surge in oil prices to subtract from growth, describing the effect as modest, and added that the economy will probably absorb a significant portion of the increase in energy costs.
Schmid also framed the policy challenge in terms of competing forces. "With many cross currents in the economy, some of which are pushing employment and inflation in different directions, policymakers face tradeoffs in pursuing this dual mandate," he said. "As I weigh those tradeoffs, I'm more focused on the risks to inflation at this time."
The speech comes after Federal Reserve officials left interest rates unchanged at their March 17-18 meeting. Fed Chair Jerome Powell said at the time that it was still too early to determine how much higher energy prices would affect the economy. Separately, some Fed officials have signaled concern about the recent surge in energy costs and have said it will likely drive inflation higher.
Schmid's remarks underscore the central bank's attention to how external shocks to energy markets can influence core inflation measures, particularly through transportation-related price channels. Policymakers face the task of balancing the objective of containing inflation with labor market conditions that in some respects point in the opposite direction.