Kansas City Federal Reserve President Jeffrey Schmid said on Wednesday that the central bank must keep policy tight for the time being amid solid economic growth and persistent inflation pressures. Speaking to an economic forum in Albuquerque, New Mexico, Schmid warned it is premature to expect productivity improvements to solve still-elevated inflation.
“With inflation still running hot, it appears that demand is outpacing supply across much of the economy,” Schmid said in remarks prepared for the event. He acknowledged the possibility that rising productivity or broader adoption of artificial intelligence could eventually raise the economy’s potential and permit “a non-inflationary, supply-driven growth cycle,” but added that his assessment is that “we are not there yet.”
Given that view, Schmid argued the Fed should keep interest rates at a level that restrains some spending and investment. He warned that cutting rates too soon could allow high inflation to persist for a longer period: “Further rate cuts risk allowing high inflation to persist even longer,” he said, noting that the economy may continue to expand above trend.
Schmid’s remarks touched on a debate within policy circles. The Trump administration and Fed chief nominee Kevin Warsh have pointed to recent strong productivity readings and an expectation that AI tools will spread through the economy as reasons to consider lowering interest rates. The argument is that if the economy can generate more output with fewer resources, stronger growth could occur without rekindling inflation, reducing the Fed’s need to prioritize price stability over growth.
But Schmid urged caution about reading too much into recent productivity data. He suggested that some of the measured gains might reflect ordinary labor-market dynamics rather than a durable jump in output per worker. In particular, he noted that workers appear to be remaining in jobs longer than they did during the higher-churn period around the COVID-19 outbreak, and that firms and employees may simply be becoming more effective at their tasks.
“My contacts broadly agree that we are now in a low-hire, low-fire, low-quit labor market. One positive from this lack of churn is higher productivity,” Schmid said. “It is not clear if productivity will continue to grow at this pace.”
Schmid also noted his status within the Federal Reserve System this year, saying he is not a voting member of the Fed’s policy committee in the current cycle.
The Fed held its policy rate unchanged at its meeting late last month, and market consensus expects officials to remain on hold at least through the June 16-17 meeting. Schmid pointed to the stronger-than-expected U.S. jobs report for January, released on Wednesday, as reinforcing the case for maintaining restrictive policy for now. New U.S. inflation data scheduled for release on Friday could provide further signals to policymakers.
Schmid’s comments underline the central tension facing the Fed: whether measured productivity gains and technological adoption can sustainably lift supply capacity enough to allow lower policy rates without reigniting inflation, or whether policy must remain restrictive until a clearer disinflationary trend is established.