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

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2:31Well, hello and welcome to another episode of the Odd Thoughts podcast. I'm Tracy Allaway. And I'm Joe Weisenthal. Joe, we're back in Jackson Hole.

2:39Tracy Alloway:Where else could we be? I guess if you're watching 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. OK, 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 in the economy and so forth.

3:17Tracy Alloway: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. 49th year. So next year is the big 50. Oh, wow. We'll definitely be back for that. You've got to come back next year. If you'll have us. Oh, absolutely. I mean, it's such an amazing thing the Kansas City Fed created. a half century ago, and we just keep on trying to add to it as we go forward.

3:47Well, 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 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. But actually, yeah, but it, you know, we want to ultimately, as the Federal Reserve, make payments boring.

4:23I mean, we move five to$10 trillion 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 that's 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.

5:03So 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.

5:43One 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 the nature of what's happening for me is, I try to simplify this because I'm not that smart, go back to supply and demand. If prices are changing, then there's a dynamic between supply and demand that's occurring.

6:28It could be in bond prices or corn and wheat, whatever it is. It gets down to that when it comes to economics.

6:35Tracy Alloway: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. When you think about the 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.

7:19I 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 4 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 I have for 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-year-old Fed economist and banker 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.

8:12So 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. OK, 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 Fed chairman, Warsh, he says that yields can be a valuable signal for policymakers such as yourself. They can say something about the economy.

8:50When 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, with our policymaking tools, we have influence on the short end. We don't really have any influence on the longer end. And even though I will say this, through the last couple cycles, 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 rates. 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.

9:29For 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 curve 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 build.

10:21What 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 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.

10:40Tracy Alloway:When you talk to businesses in your district, do you encounter entities that perceive themselves to be as essentially competing with the data center build out 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, steel, copper, right? So, I mean, lately, not that the AI influences commodities like grains. They've surged the futures market on that.

11:23So absolutely, that's why we 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 Fed's work for it in the sense that if the 30-year yield is going up, you're going to have higher mortgage rates, a dampening on credit, that sort of effect.

12:05Is that the case for you? Do you see a tightening effect from those higher bond yields? 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 Or you might think that the returns on that are so astronomical that an 80 basis point move in the 10-year isn't going to affect your business model. But I think moving rates, especially policy rates, I think has a behavioral impact.

12:50And 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 that 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.

13:18Tracy Alloway:So, OK, 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 my proclivity to say, look, I think the labor force is in a pretty good place.

14:02We 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? Do you make decisioning? Either you're too slow 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 threes. 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 were several dissents. I think there were very thoughtful dissents.

14:45I 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. So I think the things he's going to, people are very, they're anticipating 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.

15:29Thank you.

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18:25Tracy Alloway:Whether you're gearing up for fall events or simply planning ahead for the season, 4imprint can help your brand show up, stay useful, and make connections that last. Explore the possibilities at 4imprint.com. 4imprint. 4certain. 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?

19:02I 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 is our chief economist, 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.

19:40I 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.

20:22And at the end of the day, we're all singular about it. But 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.

20:40Tracy Alloway:um let's talk more actually speaking of the conversation uh chairman warsh has described the quote good family fight which uh 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 fomc is operating does it does the uh does the new approach feel any, does it feel distinct versus past FOMC chairs? Yeah. So I now are into two tenures. 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.

21:24I mean, we had the pandemic challenge, then we had the inflation challenge. I really enjoyed and by the way it was hard to dissent 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 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.

22:11You 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 about and willing to accept a debate versus saying, look, you've got other leaders that say, you know, my way or the highway. And so that's that I don't like that style. I prefer the openness of a debate. Wait, so say more about the Fed chair's role in in 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 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.

23:06Which of those two roles is it? So I would say that he has left an imprint on his experience with 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. And so, 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.

24:09I 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.