Wednesday, we reported part of a speech given by Kansas City Federal Reserve President and CEO Jeff Schmid to the Rotary Club of Oklahoma City discussing monetary policy and the economic outlook.
Schmid talked about economic tailwinds and headwinds that are affecting consumer spending, many of which have implications for the continued strong beef demand in the face of inflation. Following is an edited text of the headwinds part of his speech. The tailwinds section was reported Wednesday.
ECONOMIC DRAGS
Population trends likely will limit the pace of economic growth in the years ahead. Population growth historically has been an important driver of economic growth. A growing population adds to the labor force and increases the productive capacity of the economy.
In 2025 we saw virtually zero growth in the working age population, something that never happens outside of a war or pandemic. Immigration reductions, together with the growing number of baby boomers aging into retirement, led to the slowdown in workforce growth.
However, fertility rates have been declining globally for some time, including in the US. Therefore, little to no growth in the working-age population likely will be a fixture of the US economic outlook in the years to come.
The aging population is providing a boost to demand growth through increased healthcare consumption. However, over the medium- and longer-term, slower workforce growth likely will lower the speed limit on how quickly the economy can grow.
A second and more immediate headwind to the economy stems from the recent rise in energy prices. It looks like the economy will absorb a significant oil price increase. While there is a lot of uncertainty about how the conflict in Iran will unfold, oil futures indicate prices are likely to end the year near $80 a barrel, and some analysts and businesses are preparing for even higher prices.
Large oil price increases historically have been a drag on US economic growth. Much of this stems from the severe oil shocks in the 1970s and 1980s. I expect the growth effects today will be less severe. One reason is because the economy is far more energy efficient.
In the 1970s, we consumed roughly 12,000 BTUs of energy to produce $1 of GDP. Today, that number is closer to 3,000 BTUs. In addition, the US also has shifted from being an energy importer to being a net energy exporter.
Even as a net energy exporter, the US is not insulated from disruptions abroad since oil is priced in a global market. However, the switch does mean increased energy spending is no longer a transfer of money from US energy consumers to foreign energy producers.
Despite some of these mitigating considerations, I still expect sustained higher oil prices will be a modest drag on economic growth. Every extra dollar spent on gasoline is one less dollar that households can spend elsewhere, effectively reducing real incomes and weighing on consumption.
Some of that extra spending on gasoline will flow to domestic energy producers and could be redeployed on new rigs and other capital expenditures. However, many producers today are more cautious about chasing higher prices and are likely to restrain their deployment of capital.
In the Kansas City Fed’s energy survey, 10th District producers reported needing prices above $75 a barrel to substantially increase drilling. While there is a reasonable probability that futures prices will sustain above these levels, uncertainty about the price outlook could keep many on the sideline.
Higher energy prices will increase inflation. Headline inflation figures will be affected directly by higher gasoline prices.
However, measures of inflation that exclude energy prices—referred to as core inflation—will increase as well. From food production to delivery and transportation costs to airfares, higher energy prices also will increase core measures of inflation.
An important role for monetary policy is to ensure that the effects from higher energy prices on inflation are limited.
MONETARY POLICY OUTLOOK
My outlook for monetary policy is guided by the Federal Reserve’s dual objectives of promoting maximum employment and 2% inflation. With many economic cross currents, some of which are pushing employment and inflation in different directions, policymakers face tradeoffs in pursuing this dual mandate.
As I weigh those tradeoffs, I’m more focused on the risks to inflation. In part, this reflects the conditions we faced heading into this shock.
From a growth and employment standpoint, the economy enters this period of heightened geopolitical risk from a position of strength. Several times in recent years the economy has brushed aside recession concerns. While it’s important as a policymaker to never become complacent about risks to the outlook, the resiliency of the US economy should not be underestimated.
My optimism for the economy is underpinned by the tailwinds I laid out earlier: momentum in business spending from the AI buildout, growing healthcare demand, strong household balance sheets, high productivity growth, and a labor market that is operating near full employment.
In contrast, I viewed high inflation as the more salient risk to our dual mandate even before the energy shock arrived. The latest price data for February indicated that inflation was near 3% before energy prices jumped.
Inflation has run above the FOMC’s 2% target for five years. More concerning is that progress toward that target appears to have stalled, with inflation running near 3% for several years.
And, recent developments in the Middle East likely will add to inflation. Under different circumstances a case could be made to look through the rise in energy prices as a transitory increase in inflation.
However, this oil shock comes at a time when inflation already has been too high for too long. I don’t think we can be complacent about the risks to inflation expectations. With inflation already running hot, now is not the time to assume the inflation from higher oil prices will be transitory.
As I see it, price pressures never arise as either intrinsically persistent or transitory. Rather, whether a price shock ultimately is transitory or not depends on the Fed’s perceived actions and not some internal dynamic independent of the central bank.
We must remain focused on our headline inflation objective, otherwise I believe there is a real risk that inflation will get stuck closer to 3% than 2%.
And, I take little comfort from the fact that most measures of medium- and long-term inflation expectations have not moved higher of late. I view inflation expectations not as an input into our policymaking process but as an output.
The observed stability in inflation expectations reflects the earned credibility of the Fed and the belief that monetary policy will keep inflation in check. It is our job to follow through with policy actions that validate those expectations.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $234.90 per cwt to $238.21, compared with last week’s range of $234.93 to $239.00 per cwt. FOB dressed steers and heifers went for $370.42 per cwt to $374.39, compared with $369.00 to $373.68.
The USDA choice cutout Wednesday was down $1.07 per cwt at $394.42 while select was off $0.34 at $392.59. The choice/select spread narrowed to $1.83 from $2.56 with 83 loads of fabricated product and 14 loads of trimmings and grinds sold into the spot market.
The USDA-listed the weighted average wholesale price for fresh 90% lean beef as $451.58 per cwt, and 50% beef was $193.09
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $0.90 to $1.05 a bushel over the May corn contract, which settled at $4.54 1/4, down $0.03 1/2.
The CME Feeder Cattle Index for the seven days ended Tuesday was $366.82 per cwt, up $0.89. This compares with Wednesday’s Apr contract settlement of $370.75, up $1.62.