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

Odd Lots

This episode of Odd Lots explores the first Jackson Hole Federal Reserve symposium under new Chairman Kevin Warsh, focusing on monetary poli

Key takeaways

• Atomic settlement technology promises instant payment reconciliation, requiring robust liquidity and challenging traditional financial infrastructure.
• High bond yields reflect growing demand for credit driven by AI infrastructure buildouts and commercial sector expansion.

Main topics

• Monetary policy under Kevin Warsh
• Financial innovation and atomic settlement in payments

Notable quotes

"We want to ultimately, as the Federal Reserve, make payments boring."

Conclusion

As Jackson Hole marks the beginning of Warsh's tenure, the symposium highlights evolving

Transcript preview

Speaker 7 (0:00) Hi, I'm Molly Graham, host of Work Life, a podcast from TED. The most important lessons about work usually aren't the ones anyone teaches you. They come from experience, from uncertainty, from figuring things out as you go. On this show, my expert guests and I explore how careers really unfold through change, through doubt, through the decisions that shape who we become over time. Because those moments aren't the exception. They are the work. Listen to Work Life wherever you get your podcasts. Bloomberg Speaker 1 (0:36) Audio Studios. Podcasts. Speaker 5 (0:38) Radio. News. Speaker 6 (0:51) Well, hello and welcome to another episode of the Odd Thoughts Podcast. I'm Traci Allaway. And I'm Joe Weisenthal. Joe, we're back in Jackson Hole. Speaker 3 (0:58) 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. Speaker 6 (1:08) 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. Speaker 3 (1:24) 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. thrilled to be here. All Speaker 6 (1:38) right. Well, we should get into it. And I'm glad to say we do, in fact, have the 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. Speaker 2 (1:48) Well, welcome to Jackson Hole. I mean, this is amazing. 49th year. So next year is the big 50. Speaker 6 (1:53) Oh, wow. Speaker 2 (1:54) We'll definitely be back. You've got to come back next year. If you'll have us. Oh, absolutely. I mean, it's a... 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. Speaker 6 (2:06) 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 high bond yields. Is there a connection between the two? Speaker 2 (2:25) 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, but some people. But we want to ultimately, as the Federal Reserve, make payments boring. I mean, we move $5 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 floating 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. Speaker 2 (4:19) 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. It could be in bond prices or corn and wheat, whatever it is. It gets down to that when it comes to economics. The Speaker 3 (4:56) 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? Speaker 2 (5:29) I'm pretty optimistic about the durability. Speaker 2 (5:33) 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 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. 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. 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. Speaker 6 (6:53) 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. When you see those yields, what are you seeing? What's your takeaway? Speaker 2 (7:14) 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