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

Episode Date: August 27, 2026

We are back in Jackson Hole! And this year's Federal Reserve Bank of Kansas City symposium on monetary policy might be one of the most interesting editions in years. It marks the first under new Fed Chairman Kevin Warsh, and Fed observers all over the world will be closely watching his Friday speech for signs of how he might further distinguish himself, and the institution he is in charge of, from the Jerome Powell era. This meeting at Jackson Hole also comes at a fascinating, and pretty tense, time for monetary policy in the US and abroad: high bond yields, above-target inflation, and AI's still unrealized effect on broader parts of the economy like the job market. As we have in the past, we speak with Jeffrey Schmid, the president and CEO of the Kansas City Fed, about what to expect and he also shares his thoughts on the wave of baby boomer retirements and how it's affecting the labor force, his recent FOMC votes, and he explains why this symposium is so focused on payments.See omnystudio.com/listener for privacy information.

Behind every night spent making the kids' lunches, there's a lot of suspense. Will they finally eat the veggies? Will the pasto survive the first bite? Will the lunchbox come home empty, half full, or come home at all? And will you finish episode 8 before you're done slicing the cucumbers? Get Bell Pure Fiber Internet with Craved Netflix and Disney Plus from $94 a month. Price guaranteed for two years on internet with a two-year term and auto pay credit. Visit bell.com for details and to check availability.

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you get your podcasts. Bloomberg Audio Studios. Podcasts Radio News. Well, hello and welcome to another episode of the Odd Thoughts podcast. I'm Tracy Alloway. And I'm Joe Wisenthal. Joe, we're back in Jackson Hole. Where else could we be?

I guess if you're watching it on video, it's pretty obvious. If you're listening on audio, maybe there's some mystery. But if you're listening on audio, switch and watch us on video and you'll see. Okay, for the old school audio listeners, we are back. And the backdrop to this is always literally beautiful, right? We have the mountains in the background, but I think I say this every year. I think this genuinely might be one of the most interesting Kansas City Fed economic symposiums ever.

The most interesting until the next year. But yes, there's quite a bit going on, both in terms of the substance of what everyone's here to talk about, plus the context of so many unresolved questions and the economy and so forth. So thrilled to be here. All right. Well, we should get into it. And I'm glad to say we do, in fact, have the perfect guest. Perfect guest. We're going to be speaking with Kansas City Fed President Jeff Schmidt. So thank you so much for coming back on all thoughts. Well, welcome to Jackson Hole. I mean, this is amazing. Forty-ninth year. So next year's the big 50. Oh, wow. We'll definitely be back for that. You've got to come back if you'll have us. Oh, absolutely. I mean, it's such an amazing thing that Kansas City Fed created

a half century ago. And we just keep on trying to add to it as we go forward. Well, thank you for giving us an excuse to come back to one of the world's most beautiful places every year. So the theme of this year's symposium is financial innovation in payments, but it's coming against this backdrop of general economic uncertainty and pretty, you know, high bond yields. Is there a connection between the two? Yeah. So let's park that last question because it's a good one. And let's talk a little bit about why this is important. Because some people would say, oh, man, payments, that's boring. Not us. Yeah. But it, you know, we want it ultimately, as. the Federal Reserve make payments boring. I mean, we move five to ten trillion dollars a day through the systems through multiple different pipes, payment pipes. What's really fascinating about what you're going to see in the next couple of days with some of the research this being done

is we're moving toward, I've seen the words atomic settlement in the marketplace, which is actually when payments are actually going to be instant. And through our lives, at least my life, You've always talked about float and fees. There's always been a friction and a cost of payments. Well, this innovation that we have now in technology is going to move money from me to you instantaneously, and it's going to be reconciled instantaneously. So that's the atomic side of this whole settlement business. And it's going to be, one, very innovative, but two, it's going to be somewhat disruptive, too.

And so that begs the question about how do you accommodate a system that's instant, gets back to your last question is that we're going to be talking a lot more as we go forward about two main things in our world. One is duration, duration of assets. The second is going to be liquidity. And so when you think about it, if the payment is instant, then there's got to be liquidity, proven liquidity behind it, right, to settle it. And so I think there's a couple things in your question that I think it begs. One is what's happened in the economy that's changed the nature of the yield curve, the price of money, be it short-term, long-term. Well, a lot of things. I mean, the economy is moving along nicely. It's growing. And as long as we can try to get this

inflation thing back to our mandated 2%, we're going to see a more normalized yield curve. So if you think historically, whatever's happening, the bond market's pretty good at pricing risk and price. And so, you know, the nature of what's happening for the nature of what's happening for me is I try to simplify this because I'm not that smart. It go back to demand supply and demand. If prices are changing, then there's a dynamic between supply and demand that's occurring. It could be in bomb prices or corn and wheat, whatever it is. It gets down to that when it comes to economics.

The obvious move here would be to dive in a little bit more on the inflation question. But maybe that's obvious. Maybe instead, I'm curious, since the last dots, actually, unemployment has fallen from 4.3%, I believe. to 4.1%. That fits with what you're saying. The economy is growing. Have you changed your, when you think about this sort of pace of economic gains or just the rapidity of the growth, have you lifted up your sort of general view of what trend state growth looks like? Have you become more optimistic about the durability of the expansion? I'm pretty optimistic about the durability. So I think about last year, I dissented a couple as a voting.

member of FOMC, I talked a lot about last year, still do talk about that the labor force is going through a very fascinating structural change. I mean, people in my generation, the baby boomers, I mean, we're retiring at about four million people per year. So just when you think about the dynamic of what that creates in the labor force, one, it creates opportunities. Two, it creates risk. I mean, I'm signing more retirement letters in the last three months than after the last three years. But I worry about the intellectual muscle that we're losing in that. So what that does is that challenges my 25, 35, 45, 45-year-old Fed economist and bankers saying, look, how do we think about what the job entails and how do we use AI to transfer

what the 65-year-old retiree knows to what they need to know now, not wait till they're 55 or 65. So the labor force is changing. I mean, immigration policy has an influence on it as well. But we're going to continue to go through this probably for the next decade as we kind of see the baby boom generation go out of the labor force and kind of the new entrants come in. But that's all going to be net positive for the economy. Okay, well, I'm going to ask the obvious question then and go back to inflation and what's going on with bond yields. So the 30 year above 5%, the new phase. Chairman Warsh, he says that yields can be a valuable signal for policymakers such as yourself.

They can say something about the economy. When you see those yields, what are you seeing? What's your takeaway? So I would put it in a much more macro context of just the price of money up the curve, right? So we have, you know, with our policymaking tools, we have influence on the short end. We don't really have any influence on the longer end. Even though I will say this, through the last couple cycle, the 08, post-08 and post-2020 cycle, we did take some actions inside of our balance sheet to pull duration into our balance sheet, which did influence some of the long rate. So it's not absolute that we don't have influence, but it would be more of a balance sheet action that that would happen. 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 public sector. So here again, back to supply and demand. If there's more demand for credit, you're going to have a competition between commercial and public credit. And so that's going to affect the price. So all I can say is it seems to me like the demand or the yield curves is fairly normalized inside of an economy that's growing somewhere between 2 and 3.5%.

And that the price of money is going to be influenced. by some of the more dynamic growth curves inside GDP, most notably inside the data center build, the AI bill. What I need to try to figure out is what percentage of that growth number is in this kind of cycle, right? I think about a flywheel. The more it spins, you know, you've got to figure out who that's affecting where the risks are, and I think that's what the Fed needs to do more of.

When you talk to businesses in your district, do you encounter entities that perceive themselves to be as essentially competing with the data center buildout for labor or for equipment or for freight capacity or anything? And that sort of real crowding out phenomenon that, like, do you hear that from people you talk to? Every day. I mean, think about the commodities that it takes that the data center is demanding that apply to other industries. I mean, think about the machinery industry. industry, steel copper, right? So, I mean, lately, not that the AI influences commodities like grains, they've surged the futures market on that. So absolutely, that's why we've got to peel the onion back and try to figure out what parts of the growth onion are being driven specifically

by this kind of boom effect that technology and AI and data centers is having from a commodity standpoint to other industries. I think that's a really important part of us getting inflation back down to two. Okay. So speaking of getting inflation back down to two, I mean, in addition to saying that bond yields can be an important signal for policymakers, Warsh has also suggested that higher yields can kind of do some of the feds work for it in the sense that, you know, if the 30-year yield is going up, you're going to have higher mortgage rates, a dampening on credit, that sort of effect. Is that the case for you? Do you see a tightening effect from those higher bond So I would say think about what's happened in the longer dated treasury market and really think about

how you would react as a user of that credit. So the competitive nature between commercial and public debt, that price is going to influence. It's going to create a behavior. It's either going to slow your decisioning to do that or you might think that the returns on that are so astronomical that a 80 basis point move in the tenure isn't going to affect your business model. But I think moving rates, especially policy rates, I think has a behavioral impact. So, and it should, right?

I mean, you're trying to influence the movement of capital and credit. And clearly the market is pricing and repricing risk and demand for that credit. And that's why I think you've seen the longer ends change. But I think your question is a great one, but I would think that as the price goes up, it is going to influence whether or not you're going to have accommodative or restrictive types of behaviors. So, okay, maybe moves at the long end of the curve could have some behavioral impact on the proclivity to invest or build, et cetera. But ultimately, presumably the Fed has to do something if inflation continues to run hot. Do you worry, and it's been years now of unacceptably hot inflation, just in the current part of the cycle that we're in right now, do you worry about a long-term price for the economy if the Fed right now is not perceived as taking this inflation seriously and acting on it directly? I absolutely do. I mean, I've been fairly public about what I, you know, my proclivity to say, look, I think the labor force is in a pretty good place.

we haven't done our job yet on inflation. So the question is, and I would say that it gets harder as you trend toward two, right? Because everybody worries, it's a natural thing, worry about overshoot, right? Can you, do you make decisioning, either you're too slow or you're too, or you're too aggressive? And I think that's the nature of the journey from three to two. But we clearly have had a bit of a surge into the mid-3s. It has to be addressed. That's our mandate. It's one of the two mandates.

And we have to, you know, you've seen the narrative from the last meeting. There was several dissents. I think there were very thoughtful dissents. I think it's consistent with what Chairman Warsh wants is that great debate, because he's been pretty vocal about we have a choice in the Fed to manage inflation to two. And we should be up to that task. And so I think the things he's going to, people are very, they're anticipating this, this presentation on Friday. Maybe he'll give us more insights.

I mean, got to give him a little bit of room, right? He's still only a few weeks in. But I like, he has a vast imprint of what he believes the Fed should be and what it should do. And I think I'm in his camp as far as the mission and the mandate. Behind every night spent making the kids' lunches, there's a lot of suspense. Will they finally eat the veggies? Will the pastos survive the first bite? Will the lunchbox come home empty, half full, or come home at all?

And will you finish episode 8 before you're done slicing the cucumbers? Get Bell Pure Fiber Internet with Craved Netflix and Disney Plus from $94 a month. Price guaranteed for two years on internet with a two-year term and auto pay credit. Visit bell.com for details and to check availability. Bell, connection is everything. Our hometown is not a test tube. 90 miles northeast of Nashville, a battle for the future of America plays out in one small town. Developers with right-wing ties have purchased hundreds of acres of land.

We need cities on a shining hill. This is our town, a podcast about what happens when a small town becomes the site of a social town. experiment and fights back. Guess you didn't move in on a bunch of dumb hillbillies now, did you? Listen to Our Town on the IHeart Radio app, Apple Podcasts, or wherever you get your podcasts. So you mentioned dissents, and I know you're not voting this year, but you have voted previously and you have dissented previously.

So I have a sort of behavioral FOMC question, but like what is the thought process when you decide actually, instead of just voicing some uncertainty here, I'm actually going to go for a dissent? Like what is the hurdle that you have to get over before you're willing to kind of, I don't know, push the dissent button? I don't even know how you record your actual decision. So it is here again, there's not a lot of mystery to it, right? You've got 19 people that have these amazing teams. Joe Gruber's our chief economist.

So one of the brightest people I know when it comes to trying to synthesize what's happening in the economy and try to have this discussion and debate in the 10th district about how do we represent. the seven states that we represent. So I'm a bit of a communication transmitter, right? I go around the district. I listen to what businesses and leaders, local leaders are thinking and worrying about. I bring that to the FOMC table. I speak my piece on behalf of the 10th district.

I go back to the district and I say, this is what's happening with the FOMC. So, you know, this dissent is just an action that really has a life of its. own kind of between meetings. And as you know, we love data, right? We all like to, you know, but we have to be careful about, you always have to think about where is the data today and how is it trending. And then you have to rebalance your mandate between inflation and full employment. And so everybody's going to have a little bit different opinion about that friction. And at the end of the day, we're all singular about it.

the dissent is really a mechanism of saying, I think the risks between those two mandates are weighted differently than you think they are. And that's the thing I love about the conversation. Let's talk more, actually speaking of the conversation, Chairman Warsh has described the quote, good family fight, which sounds like a good debate. Can you tell us, does the tenor feel different? I mean, the idea of all of you coming together and debating and going back and arguing it feels like I would hope that's how the FOBC is operating. Does the new approach feel any, does it feel distinct versus past FOMC chairs? Yeah, so I now are into two ten years.

I absolutely loved working with and around Jay Powell. I think he had a lot different kind of style and mandate relative to the cycle that he was in the middle of. I mean, we, we had the pandemic challenge and we had the inflation challenge. I really enjoyed, and by the way, it was hard to descend because I really have a deep respect for the way he thinks about the market and the economy. I actually have a great appreciation for what Chairman Warsh talks about. And I think less about the family fight is more about being willing and accepting to a the debate. And so, you know, look, you can get into these environments. They're big, they're heavy.

There's lots of issues that you want to deal with. But to have a chairman on any board, and I used to be chairman of bank boards, you want people's truths. You know, you want to see where they stand because, frankly, a lot of times those truths may impact the way I think about things. So it's really more about being transparent and willing to accept a debate versus saying, look, you've got other leaders that say, you know, my way of the highway. And so that's, I don't like that style. I'd prefer the openness of a debate. Wait, so say more about the Fed Chair's role in the family fight, I guess, because you hear

chairman, you think, you know, head of the household. And, you know, if you look at it. If you look at it that way, his role could either be to try to get everyone on board with what he thinks or where the economy is going at any particular moment in time, or his role could be to try to synthesize all those different viewpoints and come up with a coherent strategy and sort of transmit that communication. Which of those two roles is it? So I would say that he has left an imprint on his experience, the Fed that I have a huge amount of respect for. I mean, he was a governor through the 08 crisis. He's spent the last 15 years really steeped in economics and policy, monetary policy. A lot of the things he knows are no secret. And so I have a high amount of respect for what

he thinks because he's lived it. He's studied it. And so I'm always listening to not only him, but there's 11 other presidents that probably have double my IQ that I have just a real amount of respect for. But I do like where he's come from, where he is in this point in time, and where I think he can lead us as we continue to really pound at this dual mandate that we have. I think he, and look, he's been very public about what he feels and how important the Fed mission. is to the greatest economy on the globe. And so I really appreciate my interactions with him, and I think he's a great leader. I'm going to try and ask the version of the forbidden question, which is, how much easier would you perceive the task of getting inflation to target B were sort of the deficit

relative, were the deficit smaller? How much would that make your life easier? Or let's say, for example, the deficit was a plan to reduce the cyclical deficit to something that it, you know, resembled what it was 10 years ago or something like that. How much would that make your life easier in terms of getting back to inflation? Well, so for me, it's, you know, we elect people in Congress and in the executive branch to really try to solve those problems. I mean, it kind of gets back to this whole discussion that we've had very actively in the last few weeks and months about our reaction function. That really is where the Fed's role is, is how do we react to the data that is created by decisions that are either legislated or fiscal and how that affects the economy, but more importantly, the mandates that we have by Congress.

So it's a little bit like trying to discuss what is the optimum size of the Fed's balance. Yeah. Well, at the end of the day, it all depends. You know, it depends on the kind of reserves that you want in the system. It depends on how either fragile or strong you think the markets are at that given time. And so it's just relative. We just have to react well to continuing to get this inflation number down as long as labor is full. Okay, I'm going to turn to, I guess, a topic that's perhaps even more subjective than the optimum size of the Fed's balance sheet and talk about R-Star.

Okay. Oh, boy. So, I mean, there's a debate about whether or not, like, R-Star has just naturally been increasing recently in the state of financial conditions. When you look at financial conditions now, do you think something fundamental has changed in the U.S. economy such that perhaps we're more accommodative than we would have been otherwise? So I would say that if you think, you know, I was a banker in the 08 cycle. I mean, you know, it would be hard to second guess the actions of the Federal Reserve and the FOMC back when that was happening. Then you kind of, you know, your economy kind of gets back on track. Then you have to deal with the pandemic, you know, a few years later.

So now we're out of that. So the way I would frame this is I think actually things are normal. normalizing when it comes to our star. However, I would also say that we may be in a higher base level of our star than we were back, even pre-08. So yeah, I think from my standpoint, personally, I think we're at a fairly accommodative place for rates right now. And I think, I think we're going to, we continue to talk about the nature of our star relative to where the the yield curve and rates are today. But for me, I think things are pretty accommodative. You mentioned being a banker, just out of curiosity. Do you ever hear of a company being like,

oh, you know what we want to build that factory? But they raised rates by 25 basis points last month and now it no longer checks out. Have you ever heard of that? Very rare. Yeah, I never heard. However, I will say this, those decisions are much more of a long-dated decision. So that's why the tenure is such a benchmark because you're really, you're making that decision for 10 and 20 years. And the financing and the leverage of capital becomes much more of a long-dated kind of thing. Now, I will say this, it's much more sensitive to things like current asset stuff. So decisions on should I pre-buy inventory. If I'm going to pay another 25 or 50 basis points on my line of credit, maybe I stall that decision for, so that's when you, that's when the restrictive

of the short rate starts to influence more of the current decisioning in the market. Just real quickly, you mentioned the Fed's reaction function. Chairman Warsh has talked about his dislike of, you know, forward guidance, et cetera. And it's clear he has a different communication style than his predecessors. But, you know, there was a different communication style under the Greenspan years and so forth. That being said, do you think either the public or the other members of the FOMC have a clear handle right now on either his? or the Fed's reaction function currently. So that's one of the more exciting things, I think,

that's going to come out of the task force debate is I think we're going to get information about things like data sets. We're going to have much more clarity about communications, what works, what doesn't. You know, there's been lots of things written on, where is the Fed's role, let's say, in a market crisis scenario, let's say post-08, where should we be?

Most of that is kind of trust and confidence. You're trying to instill. But once things normalized, then, you know, I mean, I think I was watching something that Chairman Warsh talked about, better the Fed be on page B12 versus A1. And there's something to be said about that. It's a little bit like this conference, you know. We don't want payments on even B12. We just want to make sure that payments are working well. The technology is resilient.

and it's protected. And so I think you can adapt all the time, the communications that you're creating where the Federal Reserve is concerned. More important that the market has a function to decide risk and price. And you want to make sure that market's strong and that you're not making it in any way fragile with some of your communications. Are the task forces in dialogue with the regional Fed presidents? Have they sought you out to discuss some of the things?

things they're looking into. You know, there's a there's a lot of relationship overlap with the 15 that were named and I suspect that there is a lot of discussion around that. I think if Chairman Warsh has had long relationships with these folks, so but I think that'll come. I think that'll come as the the information, some of the research emerges, then I think there's going to be much more interaction and dialogue between those groups and the FORC. But as of now, not really so much. Marvin King isn't on the phone to you asking how to change the comms policy. Okay.

All right. Well, Jeff Schmidt, thank you for coming back on all thoughts. Really appreciate it. I love doing this. Thank you. Well, Joe, interesting start to what I am sure is going to be a very interesting symposium. Really fun. I love this two years in a row we've talked to Jeffrey at the start.

It hadn't clicked to me that next year is the 50th, so we have to come. to that, but obviously always fun to talk to the person who's throwing the party, you know? Like, that's the good, that is the perfect guest. Well, ask him what his plans are for the 50th anniversary. I do think the fact that the task forces don't seem to have been, like, in direct dialogue with the presidents just yet is kind of interesting. That struck me for sure. And so I wonder what's going to happen when they finally, I guess, release their findings. Jeff seemed to suggest that that's when they were going to start the actual dialogue about it.

No, there's going to be, look, there's a whole, I have. have a lot of questions about the task force because look, there's the task forces. There's a million ideas about different ways we could be measuring the economic data. There's a million ideas for different ways to communicate and so forth. And all that's great. And it's always, I think, probably a good idea to have fresh eyes. On the other hand, in the here and now, I think the big question is like, yeah, okay, but inflation is higher.

You're going to raise rates or not, right? That is to my mind. And so this is, I still think there is some ambiguity about the reaction function of the new sort of Kevin Warsh approach, et cetera. So I'm very excited to hear about the task forces, et cetera. But I think for a lot of people's respective, there's still the, okay, yeah, but inflation is still over 3%. The immediate problem of inflation above target.

Well, I guess we'll see what Warsh says on Friday. But in the meantime, shall we leave it there? Let's leave it there. Okay. This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Jill Weisenth,

you can follow me at the stalwart. Follow our producers, Carmen Rodriguez, at Carmen Armand, Dashil Bennett, at DashBot. Kale Brooks at Kail Brooks and Kevin Lazzano at Kevin Lloyd Lazzano. And for more Oddlots content, you should check out our daily newsletter. You can find that at Bloomberg.com forward slash oddlots. And you can chat about all of these topics 24-7 in our Discord. Discord.g. And if you enjoyed this conversation, then please leave a comment or like the video or better yet, subscribe.

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