Kansas City Fed President Schmid Warns Rising Long-Term Rates Are Creating Credit Friction

Jeff Schmid, president of the Federal Reserve Bank of Kansas City, stated Thursday that the sustained increase in long-term interest rates is beginning to generate friction across multiple sectors of the economy. Speaking at a conference on investing in rural America hosted by the Federal Reserve Bank of Richmond in Asheville, North Carolina, Schmid identified multifamily housing and commercial lending as areas where users of long-term credit are already feeling the impact. He noted that rising mortgage rates are also starting to influence home prices, describing this as the mechanism by which the price of credit interacts with asset valuation.

Schmid was joined on the panel by Tom Barkin, president of the Federal Reserve Bank of Richmond, and Susan Collins, president of the Federal Reserve Bank of Boston, who addressed the forces contributing to higher borrowing costs. Barkin attributed the upward pressure on rates in part to the massive demand generated by artificial intelligence infrastructure. He described the current "trillion-dollar AI buildout" and stated that it is not surprising that rates would rise when such a significant increase in demand exists in the market.

Collins observed that investment in artificial intelligence is contributing to the solid economic growth that has persisted despite elevated borrowing costs. She emphasized that these effects extend beyond specific sectors to have broader implications for the economy. However, she cautioned that it remains to be seen whether this level of investment will continue at its current pace.

In characterizing the Federal Reserve's challenge in distinguishing between demand-driven inflation and supply-side factors, Schmid used an analogy involving a seven-layer dip. He explained that the ideal balance requires equal amounts of beans and sour cream, but noted that with current AI and data center investments, there is "too much beans in that dip." Barkin added a quip to the analogy, noting there are "not enough chips," highlighting the complexity of the current economic environment.