Kansas City Fed President Jeffrey Schmid on the First…

PodcastOdd LotsJeffrey SchmidAug 27

Jeffrey Schmid links the path from roughly 3% inflation to the Federal Reserve’s mandated 2% target with a more normalized yield curve, while cautioning that policymakers could act too slowly or too aggressively. He also discusses structural labor-force change, rising credit demand, and data-center and AI investment as drivers of growth and potential inflationary pressure. Schmid argues for open FOMC debate, data-driven fiscal reactions, flexible balance-sheet policy, and communication that lets markets price risk while preserving stability.

Monetary Policy Inflation Interest Rates Labor Market AI Infrastructure Market Structure

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Key Takeaways

Schmid identifies data-center construction and the broader AI buildout as dynamic contributors to GDP growth, while noting that data centers are competing with other industries for machinery, steel, copper, labor, and freight. He says policymakers need to assess how much growth reflects the technology cycle and how much resource demand is generating inflationary pressure.

Schmid says reducing inflation from roughly 3% to the Federal Reserve’s 2% target would support a more normalized yield curve, but the process is difficult because policymakers could act too slowly or too aggressively. He also says R-star may now be higher than before the financial crisis and that current interest rates are, in his personal view, fairly accommodative, while higher long-term credit costs can weigh on capital-intensive decisions.

The retirement of roughly 4 million baby boomers annually is creating a labor-force transition expected to last about a decade, and Schmid sees AI-enabled transfer of retirees’ knowledge to younger workers as one potential opportunity. That labor shift coincides with an AI investment cycle that is increasing credit demand among commercial and public-sector borrowers, intensifying competition over the price of credit.

TECHNOLOGY

Atomic Settlement — Payment systems move roughly $5 trillion to $10 trillion daily and are moving toward atomic settlement, where payment and reconciliation occur instantaneously. Schmid says the transition will be innovative but somewhat disruptive and will require proven liquidity behind instant transactions.

“I mean, move 5 to $10,000,000,000,000 a day the systems, through multiple different pipes, payment pipes…”—

ECONOMY

Inflation Path — Schmid says returning inflation to the Federal Reserve’s mandated 2% target would support a more normalized yield curve. He says moving from roughly 3% inflation to 2% will be difficult because policymakers could act too slowly or too aggressively. The Fed must continue reducing inflation as long as labor remains full.

“Well, a lot of things. I mean, the economy is going is moving along nicely. It's growing…”—

Retiring Workforce — The retirement of roughly 4 million baby boomers per year is creating a structural labor-force transition expected to continue for about a decade. Schmid sees both risks and opportunities, including using AI to transfer retirees’ knowledge to younger workers, and says the transition will be net positive for the economy.

“So I think about last year, I dissented a couple as a voting member of FOMC…”—

Credit Demand — Schmid says economic growth and technology and AI investment are increasing credit demand among commercial and public-sector borrowers. Competition between those borrowers affects the price of credit. He describes the yield curve as fairly normalized in an economy growing between 2% and 3.5%.

“For me, what's really fascinating with a growing economy and this whole technology and AI influence is what's creating demand for credit inside that for the commercial sector and the…”—

MARKETS

Data-Center Crowding — Data-center construction is competing with other industries for machinery, steel, copper, labor, and freight capacity. Schmid says identifying these resource demands is important for understanding inflationary pressure from the technology and AI boom.

“Every day. I mean, think about the commodities that it takes that the data center is demanding that apply to other industries…”—

Jackson Hole Payments

The hosts introduce the Jackson Hole symposium, while Schmid explains how instant settlement could transform payments and increase the importance of duration and liquidity.

Labor Force Transformation

Schmid expresses optimism about durable growth but highlights baby-boomer retirements, immigration, and the challenge of transferring institutional knowledge through AI.

AI Credit Demand

Schmid links higher long-term yields to competition for credit and says data-center, AI, and commodity demand may be important sources of growth and inflationary pressure.

Inflation’s Path From Three

Schmid says inflation remains above mandate, warns policymakers could move too slowly or aggressively, and supports renewed debate about returning inflation from roughly 3% to 2%.

FOMC Dissent And Debate

Schmid describes dissent as a data-driven judgment about the relative risks to inflation and employment, and praises Chairman Warsh’s openness to vigorous internal debate.

R-Star And Reaction Function

Schmid sees real interest rates normalizing at a potentially higher level, considers current policy fairly accommodative, and explains how long- and short-term rates affect business decisions.

Fed Communication And Markets

Schmid anticipates clearer guidance from Fed task forces but emphasizes adaptable communication, resilient markets, and allowing investors to price risk themselves.

Inflation Questions Remain

The hosts reflect on the task forces and conclude that, despite institutional changes, the immediate unresolved issue remains how the Fed will respond to inflation above target.