Kansas City Fed President Jeffrey Schmid on the First Jackson Hole of the Warsh Era

In this interview at the 49th Jackson Hole Economic Symposium, Kansas City Fed President Jeffrey Schmid addresses several interconnected economic themes. On financial innovation, he highlights the significance of "atomic settlement" in payments—instant, reconciled transactions that will eliminate traditional friction and float costs. This shift demands systems with proven liquidity and raises important questions about asset duration and liquidity management in a transformed payments ecosystem.

Regarding economic growth, Schmid expresses considerable optimism about the durability of the expansion. He notes that the economy is growing between 2-3.5% and describes the labor market as in good shape, though he emphasizes the Fed has not yet completed its inflation mandate. He identifies a crucial structural shift: baby boomers retiring at 4 million per year creates both opportunities and risks, particularly regarding loss of institutional knowledge. Immigration policy influences this dynamic, but overall he sees it as net positive for long-term growth.

On inflation and bond yields, Schmid frames elevated long-term rates (30-year above 5%) through a supply-and-demand lens for credit. He argues the yield curve is fairly normalized for a 2-3.5% growth economy and that higher yields reflect competition between commercial and public debt, driven partly by demand from data center buildouts and AI infrastructure. While higher yields can have behavioral effects on investment decisions, he emphasizes the Fed's policy rate has more direct influence on short-term decisioning.

Concerning the inflation challenge, Schmid is direct: the Fed has not yet done its job on inflation and must address the recent surge into mid-3% territory. He notes the journey from 3% to 2% inflation is particularly difficult given risks of overshoot, but it remains a non-negotiable mandate.

On Chairman Warsh's leadership, Schmid describes a style emphasizing open debate and transparency over top-down direction. He contrasts this favorably with his experience under Jay Powell and emphasizes that Warsh's extensive background—including the 2008 crisis and 15 years of economic study—earns respect for his substantive views. Schmid values the "good family fight" of FOMC debate, seeing dissents as mechanisms for expressing different risk weightings between inflation and employment mandates.

Regarding fiscal policy, Schmid deflects by noting the Fed's role is to react to fiscal and legislative decisions through its reaction function, not to opine on optimal deficit levels. He frames this similarly to questions about optimal balance sheet size—ultimately data-dependent and relative to economic conditions.

On R-Star (the neutral real interest rate), Schmid argues that rates are normalizing but may rest at a higher baseline than pre-2008 levels, suggesting current conditions are fairly accommodative. He notes that while 25-50 basis point rate changes rarely kill major capital projects, they do influence current inventory and working capital decisions through short-term borrowing costs.

Finally, on the Fed's reaction function and Warsh's communication approach, Schmid indicates that task forces examining Fed communications and data measurement haven't yet dialogued extensively with regional presidents. He suggests clarity will emerge once research findings are released, noting Warsh's preference for the Fed being on "page B12" rather than "A1"—present but not prominent when markets are functioning normally.