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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Joining us this morning, Richmond fed President Tom Barkin here

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Speaker 2: on Bloomberg Television and radio worldwide, and on radio they

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Speaker 2: can't see it, but on television people can see.

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Speaker 3: You have a bit of a bandage on your head.

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Speaker 2: You just had one of those older people's kind of operations.

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Speaker 4: Yeah, there's no truth that it was what happened in

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Speaker 4: the last meeting.

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Speaker 2: All right, Speaking of the last meeting, we came out

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Speaker 2: of that believing that, or at least Wall Street, that

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Speaker 2: you're going to cut rates again in October and maybe

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Speaker 2: in December. But since then, we've gotten some numbers that

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Speaker 2: show GDP is hotter, inflation is still running hot, and

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Speaker 2: the job is claims numbers suggest companies aren't laying anybody off.

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Speaker 2: So should we have less confidence in the path going forward?

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Speaker 4: Well, I don't think you can mark to market the

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Speaker 4: next meeting every week, even though that's what the markets do.

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Speaker 4: I mean, let's see what happens on the on the employment side.

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Speaker 4: We'll get some important data in a couple of minutes

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Speaker 4: here on the inflation side, and I think we'll get

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Speaker 4: there when we get there.

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Speaker 2: Well, the majority seem to believe, at least according to

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Speaker 2: what the Chairman tells us, that inflation is going to

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Speaker 2: be a one time rise in the price level.

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Speaker 3: And overnight we got a bunch of new.

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Speaker 2: Tariffs, as you just saw on a lot of different

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Speaker 2: things from the President. How much confidence do you have

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Speaker 2: in any kind of inflation forecast at this point?

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Speaker 1: Not much.

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Speaker 4: I mean, what I definitely see happening is there are

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Speaker 4: cost increases that suppliers want to pass on. There's no

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Speaker 4: question about that, and tariffs are a big part of it.

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Speaker 4: But you could put health insurance in other other costs

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Speaker 4: in there too, But those costs are going to attempt

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Speaker 4: to get passed on to a consumer who's frankly exhausted

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Speaker 4: of price increases. And so you know, we're seeing a

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Speaker 4: lot of trading down, you know, branded to private label

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Speaker 4: kind of choices, but we're also seeing people trade off.

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Speaker 4: And it wouldn't surprise me at all if people who

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Speaker 4: are forced to accept certain price increases therefore something else

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Speaker 4: on the other side, and that's your classic relative price

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Speaker 4: trade off, and that may mean that you won't see

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Speaker 4: as much broad based inflationary impact as you'd see. You know,

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Speaker 4: price increases on particular items we'll.

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Speaker 2: See, and yet you get PCEE in an hour and

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Speaker 2: basically you've already calculated the numbers. Inflation's not moving in

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Speaker 2: the right direction. So can you still justify or how

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Speaker 2: long can you justify cutting rates in that environment?

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Speaker 1: Well, we have inflation moving in the wrong direction.

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Speaker 4: Unfortunately, we also have unemployment moving in the wrong direction.

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Speaker 4: And that was the backdrop of the last meeting. You

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Speaker 4: have to ask yourself, you know, how are the risks

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Speaker 4: still the same as you saw them two three, four

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Speaker 4: months earlier, when you had unemployment in the right direction

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Speaker 4: and inflation in the wrong direction.

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Speaker 1: You know.

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Speaker 4: My overall thesis though, is that while it's not, you know,

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Speaker 4: ticking in the right place, the downside is relatively limited.

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Speaker 4: I see, the inflation downside is limited by this customer

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Speaker 4: pushback that I just talked about, also productive, which I

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Speaker 4: think is we're seeing that at real scale, and so

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Speaker 4: that means there's less pressure to pass costs on. And

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Speaker 4: then on the unemployment side, obviously, labor supply is dropping

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Speaker 4: at the same time as labor demand, and that's keeping

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Speaker 4: the unemployment rate relatively balanced. And that's the combination of

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Speaker 4: immigration and ravocation of temporary status also, you know our generation, Mike,

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Speaker 4: which is leaving the workforce.

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Speaker 1: I mean, you're seeing a million three.

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Speaker 4: More people over sixty five out of the workforce every year,

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Speaker 4: and so you've got less labor.

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Speaker 1: Demand, low hiring, low firing environment.

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Speaker 4: But you've also got less labor supply, and that probably

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Speaker 4: means that the unemployment rate increases are going to be

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Speaker 4: relatively limited.

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Speaker 3: We at least you and I are still employed as

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Speaker 3: of today.

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Speaker 1: We'll see how this interview goes.

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Speaker 2: You suggested that companies in your district are beginning to

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Speaker 2: feel a little bit better, or at least some of

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Speaker 2: the uncertainty has come off of their planning and their thinking.

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Speaker 2: Are these kind of big new tariffs that we got

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Speaker 2: today just going to change that mind has the idea

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Speaker 2: that ongoing tariffs and ongoing disruption are going to be

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Speaker 2: part of this administration and economy.

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Speaker 3: Is that in their planning.

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Speaker 4: Well, I've been describing it as a fog that's created uncertainty,

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Speaker 4: and I definitely think in the context of the last

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Speaker 4: couple of months, the fog has started to lift. Businesses

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Speaker 4: don't know exactly what the tariff will be on their

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Speaker 4: sector necessarily.

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Speaker 1: But they kind of have a sense of the range.

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Speaker 4: People aren't really following the news every day, you know,

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Speaker 4: the same way they were back in April. And a

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Speaker 4: lot of businesses I talk to say, look, I've just

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Speaker 4: got to do something, you know, I've got to take action.

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Speaker 4: I can't be on the sidelines forever. So I am

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Speaker 4: seeing people more in the game now. If you're in

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Speaker 4: a particular sector where you see a new announcement, of

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Speaker 4: course that's gonna set you back. And so you know,

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Speaker 4: what I say about businesses in general is not true

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Speaker 4: of businesses in every sector. And so there's sectors with

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Speaker 4: a lot more clarity and sectors with a lot less clarity.

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Speaker 4: And that's I think just going to be part of

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Speaker 4: the game here.

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Speaker 2: This morning we had an investor on who basically said

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Speaker 2: markets are rising because of the idea that a year

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Speaker 2: from now rates will be substantially lower. Is that the

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Speaker 2: right way to look at it? The wrong way to

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Speaker 2: look at it?

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Speaker 1: Oh?

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Speaker 4: I wouldn't know how to think about, you know, how

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Speaker 4: markets ought to rise or not rise. I mean, we're

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Speaker 4: very much focused on trying to land the plan here

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Speaker 4: and balancing inflation unemployment. As I said, I think both

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Speaker 4: of them have ticked in the wrong direction. But on

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Speaker 4: the other hand, the downside is limited and we're just

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Speaker 4: going to have to, you know, adjust our stance as

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Speaker 4: we learn more.

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Speaker 3: Well, where's your dot?

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Speaker 2: What are you thinking in terms of the next couple

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Speaker 2: of meetings? And then for twenty twenty.

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Speaker 4: Six, Well, I really like the DOT process for me

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Speaker 4: because it's a if forces real integration of your thinking

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Speaker 4: in terms of where you think the economy is going,

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Speaker 4: where you think policy is going. But I don't have

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Speaker 4: it as a forecast prediction. It's not, you know, something

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Speaker 4: I like to talk about publicly because it adjusts. You know,

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Speaker 4: we do mark that dot to market as things go.

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Speaker 4: So you know, every meeting for me is one where

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Speaker 4: I want to stop and look at the balance between

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Speaker 4: how we're doing on the inflation side of the unemployment

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Speaker 4: side and make the right decision.

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Speaker 2: Well, the story around the FED this week has been,

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Speaker 2: shall we say, the debate over where the neutral rate is?

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Speaker 2: Where do you think it is? And how fast would

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Speaker 2: you want to get there?

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Speaker 4: Well, you know, I've seen a lot of the stuff

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Speaker 4: that's been in the press, and we're studying that, and

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Speaker 4: you know, I always try to understand all arguments and

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Speaker 4: figure out how to integrate them into my thinking. I'd

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Speaker 4: point you to the Richmond Fed neutral rate, the lubric

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Speaker 4: mathis model. It takes a lot of signal from what

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Speaker 4: you see in the real economy, and in the real

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Speaker 4: economy over the last couple of years, what you've seen

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Speaker 4: is interest rate I mean interest rates go up and

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Speaker 4: the economy stay relatively healthy, and so that model doesn't

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Speaker 4: take a lot of it doesn't It has a relatively

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Speaker 4: high neutral rate because it takes a lot of signal

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Speaker 4: from the current environment. Now things can change, but that's

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Speaker 4: where the Richmond Fed model is right now, and i'd.

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Speaker 1: Point you to that.

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Speaker 4: What number do they have where you it moves around

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Speaker 4: based on what's happening in the economy.

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Speaker 2: Well, that gets the next question is Chairman Powell saying

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Speaker 2: that you really don't want to target the neutral rate

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Speaker 2: because it moves around, also saying that for any voter

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Speaker 2: to really move things around, you have to be incredibly persuasive.

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Speaker 2: Do you find Steven Myron's arguments persuasive.

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Speaker 4: I'm looking forward to digging into them with my team,

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Speaker 4: and I like every voice in the room and every

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Speaker 4: argument in the room. You know, that's what we do

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Speaker 4: as a discipline as we sit down and try to

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Speaker 4: take those arguments apart and figure out which parts of

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Speaker 4: them really resonate with the way we think about things

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Speaker 4: and which parts don't.

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Speaker 1: We're looking forward to doing that.

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Speaker 4: Is on the neutral rate, you know, in general, I

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Speaker 4: just want to agree it's not that useful as an

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Speaker 4: operational tool.

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Speaker 1: The models out there, even the one.

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Speaker 4: That I talked about, have a confidence interval of about

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Speaker 4: two hundred basis points, and so you could say it's three,

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Speaker 4: which is a the SEP media, and you could say it's.

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Speaker 1: Three and a half or two and a half.

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Speaker 4: But if you add a two hundred basis point range

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Speaker 4: to it, you say, that's not that helpful for making

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Speaker 4: operational decisions on monetary policy. What is more helpful, and

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Speaker 4: the reason I favor in the model we've gotten Richmond,

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Speaker 4: is how are you seeing the economy react real time

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Speaker 4: to the level of rates you've got in the market.

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Speaker 4: And if you see it weakening, that's a signal that

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Speaker 4: maybe you've got it too high.

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Speaker 1: If you see it relatively strong, that's the signal. The

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Speaker 1: other way.

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Speaker 2: Logan went to Richmond to announce her idea of changing

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Speaker 2: the operational rate for the FED what do you think

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Speaker 2: of that?

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Speaker 4: Well, I appreciate Laurie making the trip. We had a

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Speaker 4: balance sheet conference yesterday that was very well attended and

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Speaker 4: I thought lots of thoughtful papers, including hers, and I

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Speaker 4: thought she made an extremely articulate, well reasoned argument, and

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Speaker 4: I'm looking forward to digging into it further.

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Speaker 3: You anticipate the FED making a change, Oh, I don't know.

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Speaker 2: The Supreme Court if it allows the President to fire

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Speaker 2: Lisa Cook?

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Speaker 3: What does that mean for the Fed?

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Speaker 4: Well, the judicial processes, local processes will operate, however they operate.

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Speaker 4: What I do every day is show up and try

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Speaker 4: to argue for the best monetary policy we can and

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Speaker 4: make the case, as you said, in a persuasive way

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Speaker 4: to my colleagues, and that's what I'm going to continue

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Speaker 4: to do.

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Speaker 2: Well, let's leave it with this, What is the best

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Speaker 2: monetary policy right now?

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Speaker 3: Continued rate cuts or do you not know? At this point?

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Speaker 4: I think you have to be very adaptive to what's

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Speaker 4: playing out here. The world I've described as one where

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Speaker 4: the labor market is weakening. It's a low hiring environment,

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Speaker 4: but the labor supply is also short, and you have

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Speaker 4: to be very attentive to that. Balance because it could

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Speaker 4: get out of balance right. Similarly, on the inflation side,

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Speaker 4: you do have these cost pressures and four and a

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Speaker 4: half years of inflation over target. On the other hand,

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Speaker 4: you're not seeing that show up and spikes and inflation

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Speaker 4: in the real time numbers. We are seeing what seems

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Speaker 4: to be a productivity boom. And so I think you

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Speaker 4: have to be very attentive to how little we know

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Speaker 4: about how each of our mandate very is going to

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Speaker 4: play out. And so, you know, I feel like very

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Speaker 4: adaptive is the way to think about it, as opposed

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Speaker 4: and that's part of why I'm not being prescriptive into well,

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Speaker 4: it's this many dood cuts over this period of time,

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Speaker 4: because I think we're going to see and learn a

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Speaker 4: lot as we go here.

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Speaker 2: Tom Barkin, thank you very much for coming up to

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Speaker 2: Washington and joining us this morning here on Bloomberg