A Fed president who spent last year demanding tougher rate policy now describes current rates as accommodative, even as inflation drifts higher and AI-driven energy demand adds a force the Fed has no clean tool to fight.
Kansas City Fed President Jeff Schmid told CNBC’s Steve Liesman at Jackson Hole that inflation is “still stubborn and it’s still sticky” and that a single hot reading did not let him “see anything clearly as far as trending.” Headline PCE ran at 3.7% year over year in July, with core PCE at 3.34%, both well above the Fed’s 2% target.
Schmid said the current policy rate is “a little bit more accommodative, certainly more accommodative than restrictive.” He dissented on rate decisions late last year because he thought policy was only modestly restrictive. A policymaker who leaned hawkish previously, now describing this rate as accommodative, is signaling the tightening chapter is finished even though inflation remains elevated.
A Hawk Softens While the Data Hardens #
Schmid’s record gives weight to the accommodative comment. He argued last year that the Fed was not being tough enough. The disinflation he expected did not arrive.
Headline PCE was 2.88% in January and has drifted higher through spring. Core PCE climbed from 3.05% in February to 3.34% in July.
The Fed funds upper bound has held at 3.75% across every observation this year, down from 4.5% as recently as September 2025. Schmid now signals the current stance leans easy.
He set the bar for progress plainly: “if it’s trending down two and a half is great. We need to get to 2%. We got to push it back down.”
Pushing inflation back down from a stance the region’s own Fed president calls accommodative is the contradiction at the center of the moment. Absent renewed tightening, which markets are not priced for, inflation is likely to be tolerated in the threes longer than the 2026 forecast assumed.
AI Buildout as Its Own Inflation Engine #
Schmid pointed to a source of demand the Fed is still sizing. “There’s a lot of data out there that says the technology boom, the AI element is creating demand, especially in things like commodity level prices,” he said.
The Department of Energy projects data centers will account for up to 12% of U.S. electrical demand by 2028. That is a step change driven by AI training and inference.
PJM Interconnection’s independent market monitor concluded that data center load growth is the primary reason for recent and expected capacity market conditions, including tight supply and high prices. Retail electricity prices have risen faster than inflation since 2022.
Investment-driven inflation is harder to address than an energy shock because the demand is durable and productive. Hyperscalers spend because they believe returns justify it, and higher rates barely slow them (we pulled together seven companies supplying the power, cooling, and networking behind that buildout in a free report). That leaves the Fed with an awkward tool. Cooling AI capex through rate hikes would require breaking other parts of the economy first, which is likely why Schmid describes current policy as accommodative rather than calling for hikes.
Energy Costs Leaking Into Everything Else #
Schmid rejected the old habit of looking through supply shocks. He called them “the outside of the onion” and said they will have an effect through the system.
The visible piece is gasoline. The national average sits at $4.08 per gallon, and energy PCE was up 15.31% year over year in July.
The less visible piece is leakage into manufacturing and downstream processes. Goods inflation moved from 0.57% a year ago to 3.72% now, closing the gap with services at 3.69%.
For a household, groceries, utilities, and replacement appliances tend to move together rather than offset each other. Consumer sentiment reflects the strain. The Michigan index printed 49.5 in June, and the personal saving rate fell to 2.8 in the second quarter from 3.9 in the first.
What Savers Are Actually Holding #
The national average 12-month CD rate is 1.71%. Against headline PCE of 3.7%, that is a negative real return before taxes.
Treasuries look better on paper. The 10-year yield is 4.66%, and the 10-year real yield from TIPS is 2.34%.
The catch is that those real yields assume the Fed defends 2%. If Schmid’s accommodative framing is where the committee actually lives, realized inflation may run closer to three than to two for a while.
Cash in a low-yield savings account is the exposed position. Money that clears the current inflation rate has to work harder than the FDIC-average CD, and average credit card APRs above 20.94% make carrying balances the mirror-image risk.
Worth watching is whether Schmid’s language spreads to other members and whether the next PCE report confirms the reacceleration. The Fed’s monetary policy page is where the September dot plot and statement will land.
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