Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the aud Lots podcast.
Speaker 2: I'm Tracy Alloway.
Speaker 3: And I'm Jico Wisenthal.
Speaker 2: So, Joe, we have a treat for authoughts listeners.
Speaker 3: That's right, we have a special episode of the podcast
Speaker 3: with Richmond Fed President Tom Barkin.
Speaker 2: So we were actually on a reporting trip shadowing Tom
Speaker 2: as he goes through some of his district and speaks
Speaker 2: to local business leaders there. We learned a lot, We
Speaker 2: spent a lot of time with him. You'll hear more
Speaker 2: from that trip in an upcoming odd Lots episode, But
Speaker 2: in the meantime, we also talked to him about some
Speaker 2: more macro trends, things that are happening right now that
Speaker 2: he's seeing in the economy, and we're going to share
Speaker 2: that portion of the interview with you right now.
Speaker 3: So, so far in twenty twenty four, we've seen three
Speaker 3: hotter than generally. The inflation data has been hotter than expected,
Speaker 3: and some of the there's certainly been some cold water
Speaker 3: on some of the soft landing optimism. What do you
Speaker 3: attribute that too, is do you think this is a
Speaker 3: new trend or is it a speed bump in the road,
Speaker 3: as they say.
Speaker 4: Well, so, I think there are two interesting things going
Speaker 4: on with the data. One is demand has been pretty robust,
Speaker 4: against most expectations that it would slow down. We got
Speaker 4: retail sales this week very strong. We've got three strong
Speaker 4: job reports this year, and so the economy in general
Speaker 4: still seems to be very healthy, and I think a
Speaker 4: lot of people wondered whether, you know, we weren't at
Speaker 4: the end of a growth period. Still seems to be strong.
Speaker 4: At the same time, inflation has remained stubbornly above three percent,
Speaker 4: you know, on a monthly annualized rate, and you know,
Speaker 4: there are lots of ways to interpret it. I am
Speaker 4: from the school that no one's as good as they
Speaker 4: are on their best day or as bad as they
Speaker 4: are on their worst. The seven months before the end
Speaker 4: of the year we ran at one point nine percent
Speaker 4: headline inflation. The last three months have been somewhat higher.
Speaker 4: If you took the ten month number, it's not that
Speaker 4: bad actually, and so I think the overall story that
Speaker 4: inflation's moderating is still the right story. But I've been
Speaker 4: of the view that inflation has been will be more
Speaker 4: stubborn to come back to two percent than we would like,
Speaker 4: and in particular in the last half of last year,
Speaker 4: part of the reason the numbers came back so nicely
Speaker 4: was that goods turned deflationary, and that offset still higher
Speaker 4: than normal levels of inflation on services in shelter. We're
Speaker 4: not trying to pick a particular mix of inflation, but
Speaker 4: it did make me worry that if goods price reductions ceased,
Speaker 4: you'd still be left with higher than normal services in shelter,
Speaker 4: and that's what's happened in the first quarter year. Is
Speaker 4: there still room for goods to reduce, of course? Is
Speaker 4: there still a story of why shelter might come down
Speaker 4: with new rents coming down, of course and with wages
Speaker 4: normalizing services. Absolutely, but it hasn't happened yet.
Speaker 2: On this note, the last time we spoke to on
Speaker 2: the podcast, you talked about the need to maybe offset
Speaker 2: housing strength in a different area. So if housing has
Speaker 2: proved to be surprisingly resilient, maybe you need to see
Speaker 2: an offset somewhere else in the economy. Is that still
Speaker 2: your thinking.
Speaker 4: Well, I'm open to housing coming down, and there are
Speaker 4: folks who've done models that suggest that with new rents
Speaker 4: coming down the way they have, we're just minutes away
Speaker 4: from shelter inflation coming down as well, and that would
Speaker 4: be great. If it doesn't come down and you want
Speaker 4: to get to two percent, then either goods or services
Speaker 4: or both need to run at less than their historic
Speaker 4: levels of inflation. That's just simple, simple math. And if
Speaker 4: it doesn't come down, that's what you'd be looking for
Speaker 4: in some sense that relative prices have changed in a way.
Speaker 4: And I want to make this point that that's entirely conceivable.
Speaker 4: Relative prices change all the time. In the two thousands,
Speaker 4: we had healthcare inflation that was quite significant and much
Speaker 4: more than it was in the nineties. But you know,
Speaker 4: goods price deflation came down, so the basket does shift,
Speaker 4: and it's fine if it shifts, just needs to get
Speaker 4: to two percent.
Speaker 3: Overall, there's sort of whispers out there and some people
Speaker 3: talk about it, and you can kind of see it
Speaker 3: in the rates options markets and stuff. But there is
Speaker 3: this talk like, what if the hiking cycle isn't actually over?
Speaker 3: What if the next rate move is not a cut
Speaker 3: as has been the presumption for a while, What do
Speaker 3: you think it would have to take or what would
Speaker 3: you have to see in the data to say, no,
Speaker 3: this isn't just a matter of waiting for the improvement
Speaker 3: to occur. There is a reason to do more work.
Speaker 4: It would have to be around inflation reaccelerating, and you know,
Speaker 4: having conviction that you need to do.
Speaker 3: And when like, I mean, okay, so we've had this
Speaker 3: little three month pick up from the previous seven months,
Speaker 3: what is like, Okay, this is actually inflation reaccelerated rather.
Speaker 2: Than just a durable trend versus a blip.
Speaker 3: Yeah, what does that look like? Well, put, I'm gonna
Speaker 3: say what is the durable? What constitutes a durable trend?
Speaker 4: I mean a trend that is durable. I think it's
Speaker 4: really hard to get into hypotheticals here, you know, what
Speaker 4: I'll what I'll say is we're in a situation today
Speaker 4: where demand is robust, but I see no signs yet
Speaker 4: that it's overheating. And overheating would lead to pressure on wages,
Speaker 4: woul lead to pressure on prices such the things we're escalating,
Speaker 4: and you can't find that in the wage numbers or
Speaker 4: even in the three month price numbers. And you can't
Speaker 4: find that. So you know, demand is robust but not overheating,
Speaker 4: and inflation is has come down and it's still coming
Speaker 4: down on a twelve month basis, but it is stubbornly
Speaker 4: you know, at least over the last three months plateaued
Speaker 4: above our target. And so I think that makes policy
Speaker 4: pretty straightforward. With today's world, which is you have restrictive
Speaker 4: rates and you want to be restrictive and bring inflation down.
Speaker 4: You can come up with scenarios where those the two
Speaker 4: parts of our mandate are in different balance. But right
Speaker 4: now I think you've got healthy but not overheated demand
Speaker 4: and you've got inflation that remain stubbornly high. So I think,
Speaker 4: to me, the polsipath is pretty straightforward.
Speaker 2: I think you anticipated my next question. But you say
Speaker 2: rates are restrictive, how are you judging the restrictiveness of
Speaker 2: monetary policy, Because when I look at something like the
Speaker 2: financial Conditions Index, up until the past week or so,
Speaker 2: or even few days, it was pretty loose. And so
Speaker 2: there seems to be a disconnect between a certain number
Speaker 2: of Fed officials who will say policy is restrictive versus
Speaker 2: looking at something like that financial conditions index, or even
Speaker 2: the amount of refinancing being undertaken by the corporate bond
Speaker 2: market or the loan market recently.
Speaker 4: Right, so there are many financial conditions indices, some of
Speaker 4: them show looser than others. The ones that seem to
Speaker 4: sort the loosest are the ones that put the most
Speaker 4: weight on the equity markets. Obviously we were with our
Speaker 4: carport manufacturer today. He would certainly say financial conditions are tight.
Speaker 4: And it's very clear to me as I talk around
Speaker 4: the economy that there are significant sectors where financial conditions
Speaker 4: are tight, and they do tend to be those sectors
Speaker 4: like this guy who's most vulnerable to construction and to
Speaker 4: home right and people spending around their home, and in
Speaker 4: his case RVs, RV garage covers are a big part
Speaker 4: of what he does. And of course RVs went crazy,
Speaker 4: but people aren't buying r v's at the same pace anymore.
Speaker 4: So I do see interest rates going to the economy,
Speaker 4: and I see that answering. But I also think it's
Speaker 4: fair to say the level of re strictness is something
Speaker 4: you take at some faith. I do like to look
Speaker 4: at you know, real tip yields to give me some sense,
Speaker 4: But you are comparing it to a hypothetical, not a hypothetical,
Speaker 4: a estimated our star. That is hard to know where
Speaker 4: you really are. And there are lots of estimates, including
Speaker 4: one from the Richmond FED, that are higher than most
Speaker 4: people's standard are stars. So yeah, be open to the
Speaker 4: notion that the level of restrictiveness is less than you think.
Speaker 4: And you would learn that through the economy. You learn
Speaker 4: that through demand accelerating more than you'd think it would,
Speaker 4: and that's something you have to be attentive to. I
Speaker 4: haven't yet concluded that the overheating would be that would
Speaker 4: be part of your case for doing more would be overheating.
Speaker 4: So you don't think as you're as restrictive as you
Speaker 4: thought you were, which meant you have to do a
Speaker 4: little more.
Speaker 3: I just have one more question. But when it comes
Speaker 3: to you know, housing obviously just you know, it's a
Speaker 3: big driver of the upward pressure on inflation through various measures.
Speaker 3: It's also sort of this major societal problem that people
Speaker 3: are frustrated with almost across the country. When you're thinking
Speaker 3: about rate policy, how much like do you think about
Speaker 3: now just okay, what's going to happen in the next
Speaker 3: three months or whatever, but how much does restrictive policy
Speaker 3: today restrain the housing supply of tomorrow, whether it's like
Speaker 3: a multifamily. We got recent numbers that new multifamily development
Speaker 3: has really fallen off quite a bit. In theory, that
Speaker 3: means housing more scarcity in twenty twenty six or whatever.
Speaker 3: Do you fold that into your thinking in terms of
Speaker 3: policy today.
Speaker 4: You try to think it through as best you can.
Speaker 4: Don't forget that the impact of higher rates on housing
Speaker 4: demand is pretty immediate, and the impact of higher rates
Speaker 4: on housing supply, because it gets delivered two years later,
Speaker 4: is more further out. And when we started raising rates,
Speaker 4: we were in the middle of as frothy a period
Speaker 4: in the housing market. As I remember, you know, twelve
Speaker 4: bids per house, houses going for forty thousand dollars over list,
Speaker 4: and you know, so low rates wasn't the answer to
Speaker 4: that particular supply and demand issue. I think this theory
Speaker 4: of the case is that you raise rates, it brings
Speaker 4: down demand to levels more in balance with supply, and
Speaker 4: while it may have an impact with supply, you get
Speaker 4: inflation under control, and then you can lower rates again
Speaker 4: so that supply can blossom. I think that's the theory
Speaker 4: of the case. I'll point out that in this and
Speaker 4: I mean you mentioned multi family, but single family starts
Speaker 4: are quite strong, been much stronger than normal in this cycle.
Speaker 4: In part because I think availability of existing homes has
Speaker 4: been so low, and multifamily starts have come down a bunch,
Speaker 4: but that was from a very very high peak, and
Speaker 4: so they're not that far off today where they were
Speaker 4: before the pandemic, and so we're stuff still getting built.
Speaker 4: There is a future potential challenge and supply, but I
Speaker 4: think the hope is that, you know, demand comes off
Speaker 4: enough that we can bring that market into better balance.
Speaker 2: Just going back to the inflation outlook, I think at
Speaker 2: this point there have been a number of FED officials
Speaker 2: who seem to have suggested that the worst outcome of
Speaker 2: the current monetary policy cycle, or one of the worst outcomes,
Speaker 2: would be if they decided to start easing only to
Speaker 2: see inflation pick back up again. And I guess my
Speaker 2: question is, why, why is that so bad? Because couldn't
Speaker 2: you just alter course? Couldn't you start tightening again if
Speaker 2: you saw that in the data.
Speaker 4: Well, I think it's hard to do my job and
Speaker 4: not be aware of the seventies. And I remember the seventies.
Speaker 4: It wasn't pretty. I also had bad hair in that era.
Speaker 4: But you know what happened in the seventies. This is
Speaker 4: the fundamental object lesson of monetary policy is every time
Speaker 4: there was the slightest hint that the economy could be
Speaker 4: turning down, they lowered rates, and then inflation came back up,
Speaker 4: and then they increased rates. And the issue is when
Speaker 4: the FED doesn't look like it's resolute on inflation, inflation
Speaker 4: doesn't come back to where it was before, it comes
Speaker 4: to higher than it was before, which means that every
Speaker 4: time to fight it, you've got to take rates even higher,
Speaker 4: which means that the damage you do the economy is
Speaker 4: even more. And so letting it expectations spiral out of control,
Speaker 4: I think is just a very risky thing for the economy.
Speaker 4: And that's not some theoretical model. We actually lived it
Speaker 4: in the seventies and and much like me, the seventies
Speaker 4: weren't pretty.
Speaker 2: Just because you mentioned our star and the neutral rate
Speaker 2: and I get the sense. And this is just based
Speaker 2: off of a Bank for International Settlements paper that came
Speaker 2: out a couple of weeks ago, but they basically suggested
Speaker 2: that maybe our star is that our stars time in
Speaker 2: the spotlight has kind of come and gone, and the
Speaker 2: ideas that while we should be focused more on what
Speaker 2: the actual inflation data is telling us rather than some hypothetical, unknown,
Speaker 2: neutral rate that we're having to estimate and triangulate from
Speaker 2: a variety of factors. Does our stars still loom large
Speaker 2: in the fed's thinking or do you think it's been
Speaker 2: sort of superseded by what we've seen in the real economy.
Speaker 4: Well, I think we certainly spend a lot of time
Speaker 4: trying to understand and think about our star and where
Speaker 4: it's headed. Not because I believe that there's one precise
Speaker 4: point estimate. The standard deviations around most estimates are quite wide,
Speaker 4: but because I think you have to do have to
Speaker 4: ask yourself the question, are you restrictive or restrictive enough
Speaker 4: for what you're trying to do to inflation? So you
Speaker 4: ask yourself that question, and if the economy comes in
Speaker 4: more robust and inflation comes in more orbust, than you
Speaker 4: ask yourself the question whether your prior assumption was right
Speaker 4: or not, and if it comes in south of where
Speaker 4: you thought, which is what happened for most of the
Speaker 4: twenty tens, then you ask yourself the question of whether
Speaker 4: your estimate of our star was too high. And so
Speaker 4: most estimates in the twenty tens came down significantly. Some
Speaker 4: of that was done by models. Some of that was
Speaker 4: done by just observation of an economy that didn't seem
Speaker 4: very robust despite extremely low rates. If we if our
Speaker 4: economy continues to be as robust it is with rates
Speaker 4: where they are, I think that'll tell you something.
Speaker 3: If it's changed.
Speaker 4: Why there are a lot of people who are better
Speaker 4: at those models than i am. I think productivity would
Speaker 4: be a very simple way to explain the change. A
Speaker 4: higher productivity economy is a higher trend growth economy, which
Speaker 4: would do it. You might argue fiscal you know, has
Speaker 4: some thing to do with it, and certainly we're at
Speaker 4: a different level of fiscal spend today than we were
Speaker 4: in the early twenty tens. But again I'm not going
Speaker 4: to profess to be the expert on that.
Speaker 2: I ask a question, why is it two percent?
Speaker 4: Is it because of the expectations part is more important
Speaker 4: than the actual number. That's like you're trying to set up.
Speaker 4: So there was a debate, you know why two percent?
Speaker 4: There was a debate in the nineties actually, and the
Speaker 4: Richmond Fed was right in the middle of it. Al
Speaker 4: brought us about what the right target should be. Interestingly,
Speaker 4: at the time, the choice was between zero and two right,
Speaker 4: because our mandate is stable prices, and there were those
Speaker 4: who thought stable means stable. Stable zero is stable. It
Speaker 4: was widely debated the way, all the way till it
Speaker 4: was announced in twenty twelve. But nowhere in that debate
Speaker 4: can you find evidence that people were debating three, four
Speaker 4: or five. They were debating one or one and a
Speaker 4: half or two or zero. Why pick two? Well, a
Speaker 4: few things that are relevant. Pretty much every central bank
Speaker 4: in the world has two plus or minus. Some have
Speaker 4: up to two or one and a half to two
Speaker 4: and a half. Second, it seems to have worked for
Speaker 4: thirty years. I mean we actually delivered it, so it's
Speaker 4: not some random number you could never get to.
Speaker 3: Third.
Speaker 4: There is mismeasurement in there, and the mismeasurement is actually
Speaker 4: thought by most people to say that actual inflation is
Speaker 4: a little bit less than the two percent number. A
Speaker 4: good example would be encyclopedias. Used to buy and I
Speaker 4: used to buy encyclopedia. No one buys an encyclopedia Today.
Speaker 4: It's on your phone, and so it's out of the index,
Speaker 4: and so it's gone from being whatever world book was,
Speaker 4: you know, three hundred and ninet nine dollars to zero.
Speaker 4: That's deflation, but it's out of the index. And so technology,
Speaker 4: actually you're not buying a camera anymore or film is
Speaker 4: taking the set of things out of the index that
Speaker 4: you know deflationary. But maybe the best reason is it's
Speaker 4: really hard to hit your target exactly. If you set
Speaker 4: a target at zero and you don't hit it exactly,
Speaker 4: you're in deflationary territory. And deflation is where everything tomorrow
Speaker 4: costs less than it does today. So the incentive to
Speaker 4: buy today goes down, which means an economy you know,
Speaker 4: tends to stagnate, and that's Japan and what has been through.
Speaker 4: So two gives you a little bit of room against zero,
Speaker 4: means we can do a little bit to cut rates
Speaker 4: when we need to. That's the theory of it.
Speaker 2: And you said, since it's work, there's no need to
Speaker 2: change it.
Speaker 4: Yeah, And in particular, you'd never change it before you
Speaker 4: hit it. And so we're out there trying to hit
Speaker 4: a target. If inflation is at three and you decide
Speaker 4: new targets three, I just don't think that works for
Speaker 4: your credibility. And that's really the major tool the FED
Speaker 4: has is credibility.
Speaker 3: All Right, Tom thank you so much. That was fantastic.
Speaker 4: No, I love you guys. Great to with you.
Speaker 3: Thank you so much.
Speaker 4: Thank you.
Speaker 2: Keep that in Dash. That was our conversation with Tom Barkin.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3: And I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 3: Follow our producers Carman Rodriguez at Carman armand Dash, Ol
Speaker 3: Bennett at Dashbot and kill Brooks at kil Brooks. And
Speaker 3: thank you to our producer Moses Ondom. More odd Laws
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