Long-end rates are high not because policy is weak, but because AI data centers are competing for funds
Kansas City Fed President Schmid said at Jackson Hole that the 30-year Treasury yield above 5% is the result of AI and data centers competing for funds; his personal view is that monetary conditions remain loose, and inflation running at mid-threes must be addressed.
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The argument · tap a timestamp to hear it
The endgame of payment innovation is to make payments boring
Schmid said the Fed's goal is to make payments boring: settling $5 to $10 trillion daily through multiple pipelines, and future technology will eliminate frictions like float and fees, achieving atomic settlement—funds transfer and reconciliation instantaneously. On one hand, this is highly innovative; on the other, it brings disruptive impacts, so we must discuss how to maintain certainty on an instant system. This sets the stage for the conference theme: payment innovation is not a technology problem but a settlement and liquidity problem.
— Jeff SchmidAn instant settlement world must reprice liquidity
Asked about the link between bond yields and the conference theme, Schmid brought the discussion back to two words: duration and liquidity. If payments are instant, there must be verified liquidity behind them to complete settlement. With positive economic growth and inflation not yet back to 2%, the yield curve will reprice at a more normal level. In other words, high long-end rates are not just a result of monetary policy, but the entire system repricing the liquidity and duration required by an instant settlement world.
— Jeff SchmidBaby boomer retirement drains experience, not just bodies
Schmid said his baby boomer generation is retiring at about 4 million people per year, and in the past three months he has signed more retirement letters than in the previous three years. This creates both opportunities and risks: he worries about losing 'intellectual muscle,' so he repeatedly asks his Fed economists and bankers: how to use AI to translate the experience of 65-year-old retirees to those who are now 25, 35, or 45, rather than waiting until they are 55 or 65 to learn. Immigration policy also has an impact, but this process will last a decade and ultimately be net positive for the economy.
— Jeff SchmidThe AI boom is pushing up prices of steel and copper
Asked whether businesses in his district feel the 'real crowding out' from data centers, Schmid said he hears about it every day. Data center demand for machinery, steel, copper, and other commodities directly transmits to other industries, and even agricultural futures have risen. His approach is to use an onion-peeling method to determine what percentage of current growth comes from the AI/data center boom. This is crucial for his judgment on whether inflation can be brought back to 2%—not looking at GDP broadly, but breaking it down to see which sectors are overheating.
— Jeff SchmidEmployment is fine, but inflation doesn't allow a pivot now
Schmid publicly acknowledged: the labor market is in a good place, but the inflation task is not complete. The closer we get to 2%, the harder the decisions—everyone worries about overshooting, and the potential error is being too slow or too aggressive. Recent inflation running at mid-threes must be addressed. He called his recent dissents 'considered dissents' and believes this is exactly the debate atmosphere Warsh wants: the Fed has an obligation to manage inflation to 2% and should have the ability to do so.
— Jeff SchmidDissenting is not emotion, it's a different weighting of risks
Schmid explained his decision threshold for past dissents: the FOMC has 19 people, each with their own team; his role is as a 'communication transmitter,' bringing the concerns of business owners and local leaders from the seven states of the Tenth District to the table, and then bringing FOMC discussions back to the district. Dissent is not emotion but a mechanism—expressing 'I think the risk weighting between the two goals of maximum employment and inflation is different from what you estimate.' He believes this is the most valuable part of FOMC discussions.
— Jeff SchmidThe neutral rate floor is higher, and current policy is actually loose
Schmid said that if he had the 2008 cycle and the pandemic cycle in front of him, he would not second-guess the policies of that time; the more accurate framework now is that 'r-star is normalizing,' but its underlying level may be higher than before 2008. Therefore, his personal judgment is that current interest rates are in a fairly loose position, and the Fed needs to continue discussions around the relative position of r-star and the yield curve. This statement directly supports his stance that 'inflation is not complete and monetary policy should not ease prematurely.'
— Jeff SchmidThe Fed shouldn't be on the front page; markets must price risk themselves
Schmid quoted Warsh's view: rather than appearing on the A1 page, the Fed should retreat to the B12 page—meaning the central bank should not crave the front page but should stay low-key while ensuring the payment system and technology run robustly. His expectation for the task force is to re-examine data sets and communication methods, clarifying which communications are effective and which are not; more importantly, the market itself must bear the function of pricing risk, and Fed communication cannot make the market fragile. He also revealed: there has been no substantive dialogue yet between the task force and regional Fed presidents.
— Jeff SchmidIn their own words · checked verbatim
we move $ 5 to $ 10 trillion a day through the systems, through multiple different pipes, payment pipes.
Jeff Schmid2:06
if the payment is instant, then there's got to be proven liquidity behind it to settle it.
Jeff Schmid3:07
I think the labor force is in a pretty good place. We haven't done our job yet on inflation.
Jeff Schmid11:16
But we clearly have had a bit of a surge into the mid threes. It has to be addressed.
Jeff Schmid12:18
I'm a bit of a communication transmitter, right? I go around the district.
Jeff Schmid14:29
I think we're at a fairly accommodative place for rates right now.
Jeff Schmid21:34
Very rare. Yeah, I never heard.
Jeff Schmid22:37
Figures
| Baby boomer retirement pace | about 4 million people per year | 5:08 |
| U.S. economic growth range (Schmid's framing) | 2% to 3.5% | 7:09 |
| Unemployment rate change (as cited by hosts) | from 4.3% to 4.1% | 4:08 |
| Example of 10-year yield move | 80 basis points | 10:14 |
| Current inflation rebound level | mid threes | 12:18 |
| 30-year Treasury yield | above 5% | 6:08 |
Glossary
- atomic settlement
- A settlement method where fund transfer and reconciliation occur simultaneously and instantly, eliminating frictions like float and fees.
- r-star
- The neutral real interest rate that neither stimulates nor restrains economic growth; a reference for judging the stance of monetary policy.
- reaction function
- The rule by which a central bank adjusts policy in response to economic data and fiscal/legislative outcomes.
- forward guidance
- A communication tool where the central bank pre-announces its future policy path; Warsh explicitly dislikes it.
- dual mandate
- The two statutory goals Congress has given the Fed: stable prices and maximum employment.
- dissent
- A vote against the majority decision by an FOMC member, expressing a different view on the risk weighting between the two goals.
How to listen
Macro traders and rates strategists focused on the Fed's path, as well as policy researchers studying how AI infrastructure transmits to inflation and the real economy.
The first minute of pleasantries and the last minute of social media information can be skipped.