Overview of Bloomberg Odd Lots — Kansas City Fed President Jeffrey Schmid on the First Jackson Hole of the Warsh Era
This episode from Bloomberg’s Odd Lots centers on Jackson Hole and an interview with Kansas City Fed President Jeff Schmid, who discusses the new “Warsh era” at the Fed, the outlook for inflation and growth, and how financial innovation—especially in payments, AI, and data centers—is reshaping both the economy and monetary policy. Schmid comes across as optimistic about the durability of the expansion, but firmly focused on the Fed’s unresolved inflation problem.
Main Topics Discussed
Jackson Hole and the symposium theme
- The hosts frame this as one of the most interesting Jackson Hole meetings in years, given the uncertainty in the economy and the arrival of Kevin Warsh as Fed chair.
- This year’s symposium theme is financial innovation in payments, which Schmid says is relevant because payments are moving toward instant settlement.
- He notes that the Fed’s job is to make payments “boring,” even though the underlying technology is becoming more disruptive.
The Fed’s inflation challenge
- Schmid says the Fed has not finished its job on inflation.
- He argues that:
- The economy is growing reasonably well.
- The labor market is still in a good place.
- Inflation, however, remains too high and must be brought back to 2%.
- He sees the current environment as one where the Fed has to manage the difficult path from roughly 3% inflation back to 2%, with the risk of either moving too slowly or tightening too aggressively.
Bond yields, the yield curve, and “the price of money”
- Schmid views elevated long-term yields as part of a broader repricing of risk and credit, not as a simple policy signal the Fed controls directly.
- He emphasizes:
- The Fed has more influence over the short end of the curve.
- Long-end rates are more market-driven, though balance sheet actions can affect them.
- He repeatedly returns to supply and demand as the simplest explanation for changing yields, credit conditions, and asset pricing.
AI, data centers, and crowding out
- Schmid says the AI/data center buildout is materially affecting the economy.
- He believes it is:
- Driving demand for commodities like steel, copper, machinery, and energy-related inputs.
- Potentially crowding out other industries in labor, equipment, freight, and credit markets.
- He suggests this boom could be contributing to inflationary pressure and complicating the Fed’s efforts to get inflation back to target.
Labor force changes and retirement
- Schmid is notably optimistic about economic durability, but he highlights a major structural shift in the labor market:
- Roughly 4 million baby boomers retire each year.
- This creates both opportunities and risks.
- He says AI may help transfer expertise from retiring workers to newer workers, preserving institutional knowledge and productivity.
Schmid’s View on Rates and Financial Conditions
Are high long-term yields doing some of the Fed’s work?
- Schmid agrees that higher long-term rates can have a tightening effect through mortgage rates, borrowing costs, and investment behavior.
- But he frames it as a behavioral and market-pricing issue rather than something the Fed directly controls.
- He notes that higher rates may:
- Slow some investment decisions.
- Affect short-term capital management more than long-term projects.
- He also says the current rate environment still looks fairly accommodative to him.
R-star and normalization
- On the debate over r-star (the neutral interest rate), Schmid says:
- Conditions may be normalizing after the distortions of the 2008 crisis and the pandemic.
- The U.S. may still be operating at a higher base level of r-star than before 2008.
- His overall takeaway: rates still do not look especially restrictive to him.
Fed Process, Dissents, and the “Family Fight”
Why dissent?
- Schmid explains that dissents reflect a difference in how members weigh the Fed’s dual mandate:
- Inflation
- Full employment
- He describes his role as a communicator for the 10th District, bringing local business and labor concerns into FOMC debates.
- Dissent, in his view, is not dramatic—it is simply a way to signal that the balance of risks looks different to him than to other policymakers.
Warsh’s leadership style
- Schmid says he respects both Jay Powell’s and Kevin Warsh’s approaches.
- He likes Warsh’s emphasis on:
- Open debate
- Transparency
- Hearing people’s “truths”
- He interprets the “good family fight” idea as a healthy willingness to debate, not dysfunction.
Reaction function and communication
- Schmid says Warsh’s task forces may eventually lead to:
- Better data sets
- Clearer communication
- Better understanding of what works and what doesn’t in Fed messaging
- He suggests the Fed should avoid becoming too visible in day-to-day market pricing and instead focus on maintaining a strong, resilient market structure.
Key Takeaways
- Inflation is still the central problem. Schmid is comfortable with labor market conditions but not with price stability.
- The economy appears durable, helped by growth, AI investment, and ongoing structural changes in the labor force.
- AI/data center spending is important macroeconomically because it is increasing demand for inputs and credit, possibly affecting inflation.
- Long-term yields matter, but the Fed mainly controls the short end of rates.
- The new Fed chair’s style appears more debate-oriented, and Schmid seems supportive of that approach.
- The task forces and communications review could reshape how the Fed presents itself, but Schmid implies the real policy test remains whether inflation gets back to 2%.
Notable Quote
- Schmid on the Fed’s mission: “We haven’t done our job yet on inflation.”
- On the future of payments: “We’re moving toward atomic settlement… payments are actually going to be instant.”
Closing Context
The episode ends with the hosts noting that next year will be Jackson Hole’s 50th anniversary, and that the biggest near-term question remains whether the Warsh-led Fed will act decisively if inflation stays above target.