Kansas City Federal Reserve President Jeffry Schmid told the Secured Finance Network’s Independent Finance Roundtable in Kansas City recently that he was concerned about the possibility of inflation in the US.
“The recent tariff announcements have elevated economic uncertainty and have coincided with a decline in consumer sentiment and increases in near-term inflation expectations,” Schmid said in prepared remarks from the gathering.
INFLATION WORRIES VS EMPLOYMENT AND GROWTH
Contacts at other Federal Reserve banks, Schmid said there is “a marked increase in the upside risks around inflation along with elevated downside risks to the outlook for employment and growth.” This makes the Fed’s job of setting policy to balance inflation against growth and employment concerns a real tightrope.
While tariffs, in theory, should have a temporary effect on inflation with a long-term effect on prices, he expressed concern that experience with high inflation showed any further jump in prices could embed inflation expectations among consumers.
“One enduring lesson of the high inflation period of the 1970s and early 1980s was that once inflation is embedded in expectations it becomes much more difficult to contain,” Schmid said.
LONGER-TERM CONSIDERATIONS
There are two offsetting factors influencing the outlook for interest rates in the longer term, he said.
First, demographic transition in the US is likely to weigh on interest rates going forward, Schmid said. Evidence suggests that countries with faster population growth and younger populations tend to have higher levels of capital investment and a greater desire to borrow, both of which work to push interest rates.
In contrast, older, slower growing economies borrow and invest less, pressuring interest rates, he said.
The US is in a demographic transition that likely will pressure interest rates, Schmid said. The ratio of retirees per working-age adult has been creeping up for decades but accelerated lately as Baby Boomers retire.
“Over the next 45 years, the US Census Bureau projects that the working age population will increase by only 2 million individuals, a considerable downshift that has important implications for growth and the long-run level of interest rates,” he said. This flattening of the workforce places more reliance on productivity growth to drive economic growth.
The second factor, which argues for higher interest rates, relates to the supply and demand for US assets and government debt, Schmid said. If the supply of government debt expands faster than growth in demand to hold the debt, interest rates will be pushed up.
He feared that decreased foreign demand for US debt would contribute to the need for higher interest rates.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $205.29 per cwt to $214.53, compared with last week’s range of $208.00 to $213.76 per cwt. FOB dressed steers, and heifers went for $325.54 per cwt to $329.95, compared with $328.43 to $333.61.
The USDA choice cutout Tuesday was down $0.20 per cwt at $335.43 while select was down $0.61 at $315.24. The choice/select spread widened to $20.19 from $19.78 with 122 loads of fabricated product and 25 loads of trimmings and grinds sold into the spot market.
The USDA-listed the weighted average wholesale price for fresh 90% lean beef was $379.35 per cwt, and 50% beef was $122.55.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.20 to $1.32 a bushel over the May corn contract, which settled at $4.81 1/4, down $0.03 3/4.
No live cattle were tendered for delivery Tuesday.
The CME Feeder Cattle Index for the seven days ended Monday was $288.07 per cwt, up $0.91. This compares with Tuesday’s Apr contract settlement of $289.37, up $1.32, and May’s $282.52, up $1.57.