Federal Reserve Bank of Kansas City chief Jeffrey Schmid signals cautious optimism for 2026

The United States Federal Reserve Bank of Kansas City, Missouri, recently held a speech at the Economic Forum of Albuquerque, New Mexico, to discuss monetary policy and the economic outlook of the country for 2026.

The President and CEO of the Kansas City Fed, Jeffrey Schmid, gave a speech on Wednesday to a large group of local business leaders, policymakers, economists, and financial professionals. The Kansas City Fed is one of twelve regional Reserve Banks that help shape national monetary policy. The speech was held at the Economic Forum of Albuquerque, an annual event where various parties convene to discuss both regional and national economic matters. The main focal point of Schmid’s speech was to convey where the U.S. economy currently stands and is headed going into the new year.

Schmid had a rather positive outlook on the direction of the U.S. economy in 2026 despite the current uncertainty that has shaken up financial markets. Key talking points of his speech beyond his overall economic outlook included productivity trends and AI, inflation and monetary policy, and the Federal Reserve’s balance sheet. He also addressed supply versus demand-driven growth, demand dynamics, and how price shocks should be interpreted.

Jeff Schmid’s speech and 2026 U.S. economic outlook

Schmid opened the speech by talking about the Kansas City Fed’s role in the U.S. Federal Reserve’s regional structure, addressing local economic information for their region, and how it helps shape national monetary policy. From there, he broadened his scope to the overall economic outlook of the U.S. in 2026. Schmid stated that Gross Domestic Product (GDP) expanded by 4.4% in the third quarter of 2025, and other available data from the end of last year showed the economy remained resilient through the end of 2025. This was mainly led by consumer spending and AI-related investments.

He took a rather cautious stance when speaking on inflation, essentially stating that you can’t assume it will fall because of strong GDP numbers. On one hand, he stated that supply-driven economic growth, which can be boosted by factors like increased AI-driven productivity, is disinflationary. Demand-driven growth, on the other hand, is not. This happens when consumer spending increases, credit expands, and financial conditions loosen. Inflation has been running above the Fed’s target for close to five years. This suggests that while demand could still be strong, the economy may also continue to be running above sustainable capacity.

When determining the proper course for monetary policy, Schmid believes that it is important to understand the source of economic growth. Strong GDP numbers do not justify rate cuts if the growth is demand-driven. However, if this growth is supply-driven, monetary easing would be justified. This being the case, Schmid believes the Fed must refrain from easing monetary policy until the source of U.S. economic growth is determined.

Artificial Intelligence, monetary policy, and Fed balance sheet

Jeff Schmid believes recent productivity trends allude to economic growth that is at least partially supply-driven. He stated that even though hiring remained low in 2025, productivity still increased without payrolls doing the same. This could reflect the large-scale adoption of AI and how businesses have been able to cut costs through its utilization while still boosting output.

However, Schmid doesn’t believe there is enough data to support this. Instead, he attributed the situation to a “low-hire/low-fire/low-quit labor market,” while stating that business investment in AI has contributed to demand-driven economic growth. Schmid remains optimistic that AI and other technological innovations will lead to a “non-inflationary, supply-driven growth cycle” in the future.

Regarding monetary policy, Schmid supported the Federal Open Market Committee (FOMC) decision to pause rate cuts in January. He emphasized that it is their job to keep inflation near 2% and maintain full employment. As inflation is currently running closer to 3%, he believes it is appropriate to maintain a relatively restrictive stance towards monetary easing to prevent sustained inflation. The central bank’s response to inflation will ultimately determine whether price shocks will be temporary or lasting.

Jeff Schmid’s overall position on the Fed balance sheet is that it should grow only to maintain rate control and liquidity and should eventually be downsized as time progresses. He believes the Fed currently has too large a footprint in financial markets and that it needs to continue winding down on mortgage-backed securities to focus on a smaller, Treasury-focused balance sheet in the future.

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