Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Joining us this morning, Richmond fed President Tom Barkin here
Speaker 2: on Bloomberg Television and radio worldwide, and on radio they
Speaker 2: can't see it, but on television people can see.
Speaker 3: You have a bit of a bandage on your head.
Speaker 2: You just had one of those older people's kind of operations.
Speaker 4: Yeah, there's no truth that it was what happened in
Speaker 4: the last meeting.
Speaker 2: All right, Speaking of the last meeting, we came out
Speaker 2: of that believing that, or at least Wall Street, that
Speaker 2: you're going to cut rates again in October and maybe
Speaker 2: in December. But since then, we've gotten some numbers that
Speaker 2: show GDP is hotter, inflation is still running hot, and
Speaker 2: the job is claims numbers suggest companies aren't laying anybody off.
Speaker 2: So should we have less confidence in the path going forward?
Speaker 4: Well, I don't think you can mark to market the
Speaker 4: next meeting every week, even though that's what the markets do.
Speaker 4: I mean, let's see what happens on the on the employment side.
Speaker 4: We'll get some important data in a couple of minutes
Speaker 4: here on the inflation side, and I think we'll get
Speaker 4: there when we get there.
Speaker 2: Well, the majority seem to believe, at least according to
Speaker 2: what the Chairman tells us, that inflation is going to
Speaker 2: be a one time rise in the price level.
Speaker 3: And overnight we got a bunch of new.
Speaker 2: Tariffs, as you just saw on a lot of different
Speaker 2: things from the President. How much confidence do you have
Speaker 2: in any kind of inflation forecast at this point?
Speaker 1: Not much.
Speaker 4: I mean, what I definitely see happening is there are
Speaker 4: cost increases that suppliers want to pass on. There's no
Speaker 4: question about that, and tariffs are a big part of it.
Speaker 4: But you could put health insurance in other other costs
Speaker 4: in there too, But those costs are going to attempt
Speaker 4: to get passed on to a consumer who's frankly exhausted
Speaker 4: of price increases. And so you know, we're seeing a
Speaker 4: lot of trading down, you know, branded to private label
Speaker 4: kind of choices, but we're also seeing people trade off.
Speaker 4: And it wouldn't surprise me at all if people who
Speaker 4: are forced to accept certain price increases therefore something else
Speaker 4: on the other side, and that's your classic relative price
Speaker 4: trade off, and that may mean that you won't see
Speaker 4: as much broad based inflationary impact as you'd see. You know,
Speaker 4: price increases on particular items we'll.
Speaker 2: See, and yet you get PCEE in an hour and
Speaker 2: basically you've already calculated the numbers. Inflation's not moving in
Speaker 2: the right direction. So can you still justify or how
Speaker 2: long can you justify cutting rates in that environment?
Speaker 1: Well, we have inflation moving in the wrong direction.
Speaker 4: Unfortunately, we also have unemployment moving in the wrong direction.
Speaker 4: And that was the backdrop of the last meeting. You
Speaker 4: have to ask yourself, you know, how are the risks
Speaker 4: still the same as you saw them two three, four
Speaker 4: months earlier, when you had unemployment in the right direction
Speaker 4: and inflation in the wrong direction.
Speaker 1: You know.
Speaker 4: My overall thesis though, is that while it's not, you know,
Speaker 4: ticking in the right place, the downside is relatively limited.
Speaker 4: I see, the inflation downside is limited by this customer
Speaker 4: pushback that I just talked about, also productive, which I
Speaker 4: think is we're seeing that at real scale, and so
Speaker 4: that means there's less pressure to pass costs on. And
Speaker 4: then on the unemployment side, obviously, labor supply is dropping
Speaker 4: at the same time as labor demand, and that's keeping
Speaker 4: the unemployment rate relatively balanced. And that's the combination of
Speaker 4: immigration and ravocation of temporary status also, you know our generation, Mike,
Speaker 4: which is leaving the workforce.
Speaker 1: I mean, you're seeing a million three.
Speaker 4: More people over sixty five out of the workforce every year,
Speaker 4: and so you've got less labor.
Speaker 1: Demand, low hiring, low firing environment.
Speaker 4: But you've also got less labor supply, and that probably
Speaker 4: means that the unemployment rate increases are going to be
Speaker 4: relatively limited.
Speaker 3: We at least you and I are still employed as
Speaker 3: of today.
Speaker 1: We'll see how this interview goes.
Speaker 2: You suggested that companies in your district are beginning to
Speaker 2: feel a little bit better, or at least some of
Speaker 2: the uncertainty has come off of their planning and their thinking.
Speaker 2: Are these kind of big new tariffs that we got
Speaker 2: today just going to change that mind has the idea
Speaker 2: that ongoing tariffs and ongoing disruption are going to be
Speaker 2: part of this administration and economy.
Speaker 3: Is that in their planning.
Speaker 4: Well, I've been describing it as a fog that's created uncertainty,
Speaker 4: and I definitely think in the context of the last
Speaker 4: couple of months, the fog has started to lift. Businesses
Speaker 4: don't know exactly what the tariff will be on their
Speaker 4: sector necessarily.
Speaker 1: But they kind of have a sense of the range.
Speaker 4: People aren't really following the news every day, you know,
Speaker 4: the same way they were back in April. And a
Speaker 4: lot of businesses I talk to say, look, I've just
Speaker 4: got to do something, you know, I've got to take action.
Speaker 4: I can't be on the sidelines forever. So I am
Speaker 4: seeing people more in the game now. If you're in
Speaker 4: a particular sector where you see a new announcement, of
Speaker 4: course that's gonna set you back. And so you know,
Speaker 4: what I say about businesses in general is not true
Speaker 4: of businesses in every sector. And so there's sectors with
Speaker 4: a lot more clarity and sectors with a lot less clarity.
Speaker 4: And that's I think just going to be part of
Speaker 4: the game here.
Speaker 2: This morning we had an investor on who basically said
Speaker 2: markets are rising because of the idea that a year
Speaker 2: from now rates will be substantially lower. Is that the
Speaker 2: right way to look at it? The wrong way to
Speaker 2: look at it?
Speaker 1: Oh?
Speaker 4: I wouldn't know how to think about, you know, how
Speaker 4: markets ought to rise or not rise. I mean, we're
Speaker 4: very much focused on trying to land the plan here
Speaker 4: and balancing inflation unemployment. As I said, I think both
Speaker 4: of them have ticked in the wrong direction. But on
Speaker 4: the other hand, the downside is limited and we're just
Speaker 4: going to have to, you know, adjust our stance as
Speaker 4: we learn more.
Speaker 3: Well, where's your dot?
Speaker 2: What are you thinking in terms of the next couple
Speaker 2: of meetings? And then for twenty twenty.
Speaker 4: Six, Well, I really like the DOT process for me
Speaker 4: because it's a if forces real integration of your thinking
Speaker 4: in terms of where you think the economy is going,
Speaker 4: where you think policy is going. But I don't have
Speaker 4: it as a forecast prediction. It's not, you know, something
Speaker 4: I like to talk about publicly because it adjusts. You know,
Speaker 4: we do mark that dot to market as things go.
Speaker 4: So you know, every meeting for me is one where
Speaker 4: I want to stop and look at the balance between
Speaker 4: how we're doing on the inflation side of the unemployment
Speaker 4: side and make the right decision.
Speaker 2: Well, the story around the FED this week has been,
Speaker 2: shall we say, the debate over where the neutral rate is?
Speaker 2: Where do you think it is? And how fast would
Speaker 2: you want to get there?
Speaker 4: Well, you know, I've seen a lot of the stuff
Speaker 4: that's been in the press, and we're studying that, and
Speaker 4: you know, I always try to understand all arguments and
Speaker 4: figure out how to integrate them into my thinking. I'd
Speaker 4: point you to the Richmond Fed neutral rate, the lubric
Speaker 4: mathis model. It takes a lot of signal from what
Speaker 4: you see in the real economy, and in the real
Speaker 4: economy over the last couple of years, what you've seen
Speaker 4: is interest rate I mean interest rates go up and
Speaker 4: the economy stay relatively healthy, and so that model doesn't
Speaker 4: take a lot of it doesn't It has a relatively
Speaker 4: high neutral rate because it takes a lot of signal
Speaker 4: from the current environment. Now things can change, but that's
Speaker 4: where the Richmond Fed model is right now, and i'd.
Speaker 1: Point you to that.
Speaker 4: What number do they have where you it moves around
Speaker 4: based on what's happening in the economy.
Speaker 2: Well, that gets the next question is Chairman Powell saying
Speaker 2: that you really don't want to target the neutral rate
Speaker 2: because it moves around, also saying that for any voter
Speaker 2: to really move things around, you have to be incredibly persuasive.
Speaker 2: Do you find Steven Myron's arguments persuasive.
Speaker 4: I'm looking forward to digging into them with my team,
Speaker 4: and I like every voice in the room and every
Speaker 4: argument in the room. You know, that's what we do
Speaker 4: as a discipline as we sit down and try to
Speaker 4: take those arguments apart and figure out which parts of
Speaker 4: them really resonate with the way we think about things
Speaker 4: and which parts don't.
Speaker 1: We're looking forward to doing that.
Speaker 4: Is on the neutral rate, you know, in general, I
Speaker 4: just want to agree it's not that useful as an
Speaker 4: operational tool.
Speaker 1: The models out there, even the one.
Speaker 4: That I talked about, have a confidence interval of about
Speaker 4: two hundred basis points, and so you could say it's three,
Speaker 4: which is a the SEP media, and you could say it's.
Speaker 1: Three and a half or two and a half.
Speaker 4: But if you add a two hundred basis point range
Speaker 4: to it, you say, that's not that helpful for making
Speaker 4: operational decisions on monetary policy. What is more helpful, and
Speaker 4: the reason I favor in the model we've gotten Richmond,
Speaker 4: is how are you seeing the economy react real time
Speaker 4: to the level of rates you've got in the market.
Speaker 4: And if you see it weakening, that's a signal that
Speaker 4: maybe you've got it too high.
Speaker 1: If you see it relatively strong, that's the signal. The
Speaker 1: other way.
Speaker 2: Logan went to Richmond to announce her idea of changing
Speaker 2: the operational rate for the FED what do you think
Speaker 2: of that?
Speaker 4: Well, I appreciate Laurie making the trip. We had a
Speaker 4: balance sheet conference yesterday that was very well attended and
Speaker 4: I thought lots of thoughtful papers, including hers, and I
Speaker 4: thought she made an extremely articulate, well reasoned argument, and
Speaker 4: I'm looking forward to digging into it further.
Speaker 3: You anticipate the FED making a change, Oh, I don't know.
Speaker 2: The Supreme Court if it allows the President to fire
Speaker 2: Lisa Cook?
Speaker 3: What does that mean for the Fed?
Speaker 4: Well, the judicial processes, local processes will operate, however they operate.
Speaker 4: What I do every day is show up and try
Speaker 4: to argue for the best monetary policy we can and
Speaker 4: make the case, as you said, in a persuasive way
Speaker 4: to my colleagues, and that's what I'm going to continue
Speaker 4: to do.
Speaker 2: Well, let's leave it with this, What is the best
Speaker 2: monetary policy right now?
Speaker 3: Continued rate cuts or do you not know? At this point?
Speaker 4: I think you have to be very adaptive to what's
Speaker 4: playing out here. The world I've described as one where
Speaker 4: the labor market is weakening. It's a low hiring environment,
Speaker 4: but the labor supply is also short, and you have
Speaker 4: to be very attentive to that. Balance because it could
Speaker 4: get out of balance right. Similarly, on the inflation side,
Speaker 4: you do have these cost pressures and four and a
Speaker 4: half years of inflation over target. On the other hand,
Speaker 4: you're not seeing that show up and spikes and inflation
Speaker 4: in the real time numbers. We are seeing what seems
Speaker 4: to be a productivity boom. And so I think you
Speaker 4: have to be very attentive to how little we know
Speaker 4: about how each of our mandate very is going to
Speaker 4: play out. And so, you know, I feel like very
Speaker 4: adaptive is the way to think about it, as opposed
Speaker 4: and that's part of why I'm not being prescriptive into well,
Speaker 4: it's this many dood cuts over this period of time,
Speaker 4: because I think we're going to see and learn a
Speaker 4: lot as we go here.
Speaker 2: Tom Barkin, thank you very much for coming up to
Speaker 2: Washington and joining us this morning here on Bloomberg