Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. This is Masters in
Speaker 1: Business with Barry Ritholts on Bloomberg Radio.
Speaker 2: This week on the podcast, another extra special guest Richmond
Speaker 2: Federal Reserve President and CEO Tom Barkin. He's been a
Speaker 2: member of the Richmond Fed since twenty eighteen. He is
Speaker 2: also on the Federal Open Markets Committee and is responsible
Speaker 2: for a variety of Richmond Fed technology and bank supervision. Previously,
Speaker 2: Tom has spent thirty years at Mackenzie where eventually he
Speaker 2: became chief Risk Officer and then chief Financial Officer. I
Speaker 2: found this conversation absolutely fascinating. He is a super intelligent,
Speaker 2: thoughtful guy, very well versed in business economics and monetary policy.
Speaker 2: I think you will find this conversation to be both
Speaker 2: timely and fascinating. With no further ado, my conversation with
Speaker 2: FMC Committee member and President of the Richmond Federal Reserve Bank,
Speaker 2: Tom Barkin.
Speaker 3: Very thanks for having me here.
Speaker 2: What a perfect resume and a perfect person to talk
Speaker 2: about the state of the world today. Before we go there,
Speaker 2: let's just dip into your background. You're a triple threat
Speaker 2: bachelor's MBA and jd ole from Harvard. What was the
Speaker 2: original career plan.
Speaker 4: Well, it wasn't that. I grew up in Tampa, went
Speaker 4: to a public school there, applied to a few Southern
Speaker 4: schools and Harvard because it had a good name, and
Speaker 4: I thought it was sort of a neat idea, and
Speaker 4: then I got in, which was kind of a surprise.
Speaker 4: And when I went there, I was going to be
Speaker 4: a lawyer and I was going to major in mathematics.
Speaker 4: And I took my freshman year math and that all
Speaker 4: went great, and my software I ended up in a
Speaker 4: class called basic algebra, one that was not basic and
Speaker 4: was not in the algebra that I knew anything about.
Speaker 4: And it turned out that half of that class had
Speaker 4: been the US National Math team, and they had all
Speaker 4: competed internationally and they knew stuff I didn't. And I
Speaker 4: was at the time taking Introductor to Economics, which I
Speaker 4: really liked because it combined history and politics and math
Speaker 4: and economics. And so I moved my major into economics
Speaker 4: and had a great experience as an economics major. Undergrad,
Speaker 4: I was still going to go to law school, and
Speaker 4: I applied to law school and got in, but a
Speaker 4: bunch of my roommates were applying to business school, and
Speaker 4: it felt to me like that was a neat way
Speaker 4: to get a master's in something related to economics that
Speaker 4: I was interested in. And so I applied also to
Speaker 4: business school and got into that and then started that
Speaker 4: program once into law school. In business school, I was
Speaker 4: able to compare two sets of professions, one the law
Speaker 4: and the second being going into business, and it just
Speaker 4: felt like the second was much more vibrant, much more interesting,
Speaker 4: learned a lot more, and so I made that transition.
Speaker 4: But I wouldn't have made that transition if I hadn't
Speaker 4: been an economics major. I wouldn't have made that transition.
Speaker 4: If I hadn't applied to business school, I just wouldn't
Speaker 4: have the confidence to do it.
Speaker 2: So I know Wharton has like a joint CPA, JD
Speaker 2: MBA program. Did you were you enrolled as a full
Speaker 2: time JD and a full time MBA student at Harvard
Speaker 2: or were these was this sort of a combined program.
Speaker 4: It is a combined program. You take a year at
Speaker 4: law school a year at business school in two years combined.
Speaker 4: I didn't realize there was a program where you could
Speaker 4: also get a CPA. Maybe that would have been a
Speaker 4: third degree just for extra credit.
Speaker 2: I believe that's Wharton. So you come out of Cambridge
Speaker 2: with three degrees, what's the first first job you take.
Speaker 3: I went to work in McKenzie. I mean that was.
Speaker 2: Literally your first year. So you go to work in
Speaker 2: McKenzie in eighty seven and you stay for thirty years.
Speaker 4: Yeah, And I was lucky, lucky, lucky to go there.
Speaker 4: I joined an office that had about twenty five people
Speaker 4: in Atlanta. Felt like an entrepreneurial opportunity to build something,
Speaker 4: made a lot of friends there, enjoyed the work, really
Speaker 4: enjoyed my clients, and the opportunity to help a bunch
Speaker 4: of great leaders improve the performance their organizations.
Speaker 3: Fell in love with.
Speaker 4: McKenzie people, smart, talented, idealistic, and the combination just worked
Speaker 4: great for me.
Speaker 2: You've held a number of roles there, eventually becoming a
Speaker 2: senior partner, but the two that are most fascinating and
Speaker 2: relevant to your current situation is chief risk Officer and
Speaker 2: chief financial officer. Tell us a little bit about the
Speaker 2: career path to two very important roles at a very
Speaker 2: important company.
Speaker 4: Well, starting in ninety nine, I started leading the Atlanta office,
Speaker 4: which eventually became the Southern offices of McKenzie. So from
Speaker 4: Texas through Virginia. It was sort of our territory and
Speaker 4: we had I don't remember the number sixty seventy eighty
Speaker 4: partners plus another several hundred associates and we were serving
Speaker 4: clients in that geography. So I'll point to that as
Speaker 4: a role that I really enjoyed it in one where
Speaker 4: I got to spend so much time with so many
Speaker 4: business people about what was happening in their business and
Speaker 4: opportunities for McKenzie to help. We worked our way through
Speaker 4: nine to eleven. That was a very difficult time for
Speaker 4: our business, and I think coming out of it, the
Speaker 4: folks at McKenzie thought, you know, I knew how to
Speaker 4: manage a bottom line and our office got through quite nicely.
Speaker 4: And when a new managing partner was named around the
Speaker 4: financial crisis, they asked me to be the CFO to
Speaker 4: help navigate mckenzy through that, which I'm very pleased with
Speaker 4: how well we navigated through that. I did that for
Speaker 4: six years and then spent three years trying to help
Speaker 4: institutionalize some risk processes at McKenzie, including a lot of
Speaker 4: the stuff that has been done to defend against cyber
Speaker 4: and in whatever role and there are others that I'm
Speaker 4: not going to bore you with. You know, the opportunity
Speaker 4: to try to take a partnership and influence it to
Speaker 4: become better is a challenge and also a lot of fun.
Speaker 2: That sounds really interesting. So you're at McKenzie for three decades.
Speaker 2: How do you end up on the Richmond Federal Reserve.
Speaker 4: First of all, I was very involved civically in Atlanta
Speaker 4: and in lots of different organizations, and at some point
Speaker 4: I met the president, my equivalent in Atlanta, who then
Speaker 4: was Dennis Lockhart, who's a great guy, and Dennis at
Speaker 4: some point invited me to join his board from so
Speaker 4: from nine to fourteen I was on the board and
Speaker 4: then eventually the chair of the board of the Atlanta Fed.
Speaker 4: And I stepped down term limited, and three years later
Speaker 4: I was in the process of leaving McKenzie. McKinsey is
Speaker 4: a mandatory retirement age. I'm very young in my own mind,
Speaker 4: but not that young at McKenzie, and I had signed
Speaker 4: the papers and agreed to retire, and I got a
Speaker 4: call from a head hunter suggesting that I interviewed for
Speaker 4: the Richmond job, And of course I called Dennis and
Speaker 4: asked if you thought this made sense, and you know,
Speaker 4: he encouraged me to do it, and so for me,
Speaker 4: it just seemed like a great opportunity to, well, let
Speaker 4: me take something. I've really been impressed with the Atlanta
Speaker 4: Fed from nine to fourteen, feder Reserve in general, navigating
Speaker 4: to the financial crisis, all the innovations that happened in
Speaker 4: the early twenty tens. It reawakened an interest in economics
Speaker 4: that I'd had since being an undergrad. But I never
Speaker 4: thought that that's a job I would do. It just
Speaker 4: didn't occur to me until the combination of the headhunter
Speaker 4: and Dennis encouraged me to do it, and then I
Speaker 4: interviewed and was offered the job.
Speaker 2: So maybe perhaps this is a touch of hindsight bias,
Speaker 2: But thirty years at McKenzie Cybersecurity, Chief Risk Officer, chief
Speaker 2: financial Officer, the dot com implosion September eleventh, the financial
Speaker 2: crisis sounds like your tailor made to be sitting on
Speaker 2: the Fed that just never popped into your into your mind, Like,
Speaker 2: what was the moment that you said, oh, I have
Speaker 2: skills that seemed to apply to this.
Speaker 4: Yeah, you describe me as a very modest person. I'm
Speaker 4: not sure, that's true, but I'll just say I'll just
Speaker 4: say that I was so impressed with the grounding and
Speaker 4: the experience of the people that make monetary policy that
Speaker 4: it wouldn't have occurred to me that, you know, I
Speaker 4: should go stick my hand up and do that. And
Speaker 4: even when you walk into the room of the FOMC,
Speaker 4: you've got nineteen people there, they're very impressive. Probably two
Speaker 4: thirds are academic economists. They've spent their entire career working
Speaker 4: and studying in that. And of course I had taken
Speaker 4: four years of economics, you know, forty years well, I
Speaker 4: guess thirty five years earlier, and so I think it
Speaker 4: would have been, you know, pretty arrogant to imagine that
Speaker 4: that would place. That was natural for me, now, you know,
Speaker 4: when I got into the process and started thinking about it,
Speaker 4: you know, I was able to articulate a model for
Speaker 4: how I thought I could add value to the room.
Speaker 4: And I think, you know, if your performance oriented or
Speaker 4: even competitive, what you really want to do is add
Speaker 4: value to whatever job you've got. And so for that job,
Speaker 4: for this job, you know, I asked myself what could
Speaker 4: I do that would be valuable? And what I thought
Speaker 4: I can do and what I spend my days doing
Speaker 4: is trying to understand what's actually happening on the ground
Speaker 4: with businesses, because that's what I did for thirty years.
Speaker 4: I think that's a differential skill within the FOMC, because
Speaker 4: anyone can tell you they're raising prices or lowering prices,
Speaker 4: but to understand why and how things are going to
Speaker 4: play out, and to spend enough time with people and
Speaker 4: feel comfortable enough with their businesses that you could understand
Speaker 4: the context that is behind whatever choices they're making. I
Speaker 4: think that is a place where I can add real value.
Speaker 4: And I convince myself that, and I guess I convinced
Speaker 4: the board of that as well.
Speaker 2: You know, people often talk about how much they wish
Speaker 2: the government was run more like a business, and for
Speaker 2: better or worse, that doesn't always apply. But it really
Speaker 2: feels like the Federal Reserve is sort of halfway between
Speaker 2: a private sector entity and a full governmental agency, almost
Speaker 2: has a foot in each camp. Tell us how your
Speaker 2: private sector your experience helped to drive FED policy, and
Speaker 2: especially at the Richmond Fed, how it affects just the
Speaker 2: everyday operation of a large, influential central bank like that
Speaker 2: regional central bank.
Speaker 4: Well, let me start by saying. One of the things
Speaker 4: that was very attractive to me about the Federal Reserve
Speaker 4: when I got to know it in Atlanta was these
Speaker 4: banks are private sector entities, which means you have, you know,
Speaker 4: a value proposition to highly talented people who have freedom
Speaker 4: to work hard and do what they know is right.
Speaker 4: But in addition, you've got very mission oriented people. So
Speaker 4: very talented and very mission oriented. That's a nice combination
Speaker 4: for something that's working for the public interest. And so
Speaker 4: that was definitely an attraction.
Speaker 3: To me.
Speaker 4: I'm not trying to mess that up, so I'm not
Speaker 4: coming in and saying all right, now, you know, here's
Speaker 4: what we're going to do. Because I was in the
Speaker 4: private sector, you know, I'm actually I respect the institution
Speaker 4: and trying to figure out how to operate within it
Speaker 4: as opposed to disrupted and so operationally, the Richmond Fed
Speaker 4: overseas technology for the system, and I oversely saw technology
Speaker 4: in my old life, and so, you know, making sure
Speaker 4: we're better and working better and delivering better. I think
Speaker 4: we've done a great job in that. I'm also chairing
Speaker 4: the committee that oversees payments within the Federal Reserve, which
Speaker 4: is the one business the Federal Reserve runs and trying
Speaker 4: to make that a good and even better business. Those
Speaker 4: are there are places I bring my business skills to bear,
Speaker 4: talent management, all all of that stuff. In addition, as
Speaker 4: I said, I think, you know, being able to bring
Speaker 4: some insight, for example, on how businesses are going to
Speaker 4: behave in the context of volatility and tariff announcements, that's
Speaker 4: something that I think I can bring. You know, my
Speaker 4: business experience has a lot of benefit in the room,
Speaker 4: and that's it's good to just say that you bring
Speaker 4: that benefit, but I try to reinforce that by spending
Speaker 4: literally five days a week in the market talking to
Speaker 4: businesses throughout my district, trying to really dig into what's happening.
Speaker 4: I think that's a place I can also add value.
Speaker 2: So you joined the FED in twenty eighteen, and it
Speaker 2: was a very consequential seven years. Q four of twenty eighteen,
Speaker 2: people were very nervous about a recession. Market dropped about
Speaker 2: twenty percent in the quarter, some of which was related
Speaker 2: to tariff and do slowdowns back then twenty twenty obviously,
Speaker 2: the pandemic once in a generation, maybe even once in
Speaker 2: one hundred years event twenty twenty two. First, not only
Speaker 2: is the fastest rate increase in modern memory. First time,
Speaker 2: I want to say, since eighty eighty one eighty two,
Speaker 2: we're both stocks and bonds down double digits. That was
Speaker 2: twenty twenty two, and then twenty twenty five. Obviously, all
Speaker 2: this volatility and Stuerman drang with tariffs. What is the
Speaker 2: biggest occupier of your mental bandwidth? Is it the day
Speaker 2: to day operations or is it all of these seemingly
Speaker 2: unprecedented disruptions that just turn the whole world upside now,
Speaker 2: whether it's just a quarter like it was in twenty eighteen,
Speaker 2: or a couple of years like the pandemic.
Speaker 3: Well, so I joked sometimes.
Speaker 4: I was on the board of the Atlanta Fed from
Speaker 4: nine to fifteen, and during that six year period, interest
Speaker 4: rates did not change once. Nothing happened, right, And look
Speaker 4: at where we've been here from you know, raising it
Speaker 4: in twenty eighteen, to lowering it in twenty nineteen, to
Speaker 4: really lowering it in twenty twenty, then to raising it
Speaker 4: again in twenty twenty two, and then lowering it again.
Speaker 2: Are you saying it's your fault since you joined the
Speaker 2: FED everything went up?
Speaker 4: Then I'll take whatever credit or fault you want. I
Speaker 4: would say the thing I've been reflecting on is the
Speaker 4: question of did we in our working careers just benefit
Speaker 4: from a period that, with hindsight is an was an
Speaker 4: unbelievably low volatility period. You know, the wall fell, while
Speaker 4: there were conflicts globally, there weren't very many. Nine to
Speaker 4: eleven felt like a big deal at the time, but
Speaker 4: you know, Lehman Brothers was obviously a big deal.
Speaker 3: But over a thirty year period, it's pretty calm.
Speaker 4: And you know stat I like to throw out there
Speaker 4: is in the twenty tens, inflation was between one and
Speaker 4: two percent every single cycle.
Speaker 3: We added jobs every month.
Speaker 4: In the twenty tens, GDP was in the very narrow
Speaker 4: range of sort of two to three percent. We just
Speaker 4: had a very stable, long term expansion with very low inflation,
Speaker 4: and that was a very friendly environment, you know, i'd
Speaker 4: say for policymakers. But maybe that if you look at
Speaker 4: you know, through the sands of time, that kind of
Speaker 4: stability is not what you should expect. And so we've
Speaker 4: had significant volatility, the pandemic obviously being example, the inflation
Speaker 4: episode being another one, and maybe that's going to be
Speaker 4: more like reality.
Speaker 2: You know, it's so funny you say that we did
Speaker 2: a study in house and looked at the fifteen year
Speaker 2: period from the financial crisis forward. So somewhere in the
Speaker 2: middle of last year was the third best fifteen year
Speaker 2: rolling period on record. You have to look at the
Speaker 2: fifteen years post World War Two and then the fifteen
Speaker 2: years up until late ninety nine, which were eighteen and
Speaker 2: seventeen percent a year, respectively. The fifteen year period ending
Speaker 2: last year was sixteen percent annually. And all anybody did
Speaker 2: was complain about or at least a lot of market
Speaker 2: participants complained about the FED, complained about deficits, complained about
Speaker 2: the economy. It's the single best decade and a half
Speaker 2: in modern era for asset prices. So in the face
Speaker 2: of that sort of you know, criticism of the FED
Speaker 2: and carping about all sorts of policy, how do members
Speaker 2: of the FMC. How do members of the FED respond
Speaker 2: when the data says, hey, things are pretty good, but
Speaker 2: the sentiment, which continues to just get worse and worse,
Speaker 2: says things are terrible.
Speaker 4: Well, I'd start, you know, to the people who complain
Speaker 4: also by saying, we're given a priv by Congress, which
Speaker 4: is the ability and the independence to set monetary policy
Speaker 4: on behalf of the economy of this country, and we
Speaker 4: take that very seriously. I do think part of the
Speaker 4: trade there is that people on both sides get to
Speaker 4: critique what we do, and that just is what it is.
Speaker 4: And I think you just keep your head down and
Speaker 4: do the job you've been assigned and you don't spend time,
Speaker 4: you know, worrying about the critiques.
Speaker 3: So that's that part of it.
Speaker 4: In terms of uncertainty involved, I think in sentiments quite
Speaker 4: pronounced now. I think business sentiment and consumer sentiment's different.
Speaker 4: I mean, business sentiment feels to me like very tied
Speaker 4: to outcomes. If businesses are highly uncertain, they're not going
Speaker 4: to invest, they're not going to hire, they're going to
Speaker 4: defer growth plans. We saw that in twenty nineteen, as
Speaker 4: you referenced earlier. I think we're seeing that right now,
Speaker 4: certainly the businesses I'm talking to. I've described it as
Speaker 4: trying to drive through a really dense fog. It's hard
Speaker 4: to put your foot on the gas because you don't
Speaker 4: know where the next cliff is. You don't want to
Speaker 4: put your foot on the break because you don't know
Speaker 4: who's on you, and so the only rational strategy is
Speaker 4: to pull over and put on the hazards. And that's
Speaker 4: what I hear businesses doing, which is pulling and pulling
Speaker 4: over the hazards, pulling over and putting on the hazards.
Speaker 4: Now it's different on the consumer side. Historically, consumer sentiment
Speaker 4: has been a leading indicator of consumer spending, but we
Speaker 4: didn't see that two or three years ago when consumer
Speaker 4: centerment got negative, and consumer centerence has got very negative
Speaker 4: again recently. I think the reason we haven't seen that
Speaker 4: is inflation. It turns out, I mean, we all knew
Speaker 4: this in the seventies, but we've all relearned it in
Speaker 4: the last three years. It turns out consumers really hate inflation.
Speaker 4: Now it doesn't stop them from spending. You know, if
Speaker 4: your wages go up and your prices go up, you
Speaker 4: have the same spending capability, but you're just much less happy.
Speaker 4: And that's what we've seen, and I think today we'll
Speaker 4: see if we have more inflation. But I think the
Speaker 4: kind of relentless noise about tariffs is leading people to
Speaker 4: think that that's going to lead to higher prices, which
Speaker 4: is leading people to be more negative about the expectations,
Speaker 4: and you can see that in the expectations. Let's say
Speaker 4: one year price expectations have elevated significantly, and that's what's
Speaker 4: driving sentiment. But so far that doesn't seem to be
Speaker 4: affecting spending on the consumer side. I think it does
Speaker 4: on the business side.
Speaker 2: Yeah, very much. Businesses have to plan much longer term.
Speaker 2: First of all, I love the foggy metaphor. Driving in
Speaker 2: the fog is really perfect. But you mentioned inflation expectations,
Speaker 2: and I always wonder does the FED put too much
Speaker 2: emphasis on expectations, at least in the modern era. If
Speaker 2: we look at twenty twenty one twenty twenty two, inflation
Speaker 2: expectations were at their lowest just as inflation spiked, and
Speaker 2: of course they were at their highest just as inflation
Speaker 2: peaked in twenty two and began coming down. My experience
Speaker 2: with sentiment is it's always backward looking. You ask people
Speaker 2: how they feel about anything, the markets, the economy, inflation,
Speaker 2: and they're always telling you here's what the past six
Speaker 2: months have been like. Even if you say, what do
Speaker 2: you see going forward? How much, how significant, how important
Speaker 2: are inflation expectations to FOMC policy?
Speaker 4: Well, I think the theory is very straightforward, which is
Speaker 4: that if inflation expectations long term in particular, stay anchored,
Speaker 4: then that means that, you know, businesses will quickly return
Speaker 4: even after inflationary episode, to prior levels of price increases.
Speaker 3: I really believe in it.
Speaker 4: I mean, in my business experience, I think the expectations
Speaker 4: of what inflation would be absolutely governed how business has behaved,
Speaker 4: both in terms of their pricing and their wage setting.
Speaker 4: You know, if you showed up at your retailer with
Speaker 4: an eight percent price increase and inflation was two percent,
Speaker 4: they would say, why are you doing that? And if
Speaker 4: you didn't have the world's greatest reason, you weren't even.
Speaker 3: Walking in the door.
Speaker 4: And so I think, I think the concept of inflation
Speaker 4: expectations is a very powerful concept. I really believe in it,
Speaker 4: and I believe it's what happens in the world. What
Speaker 4: I don't believe is that we have any good way
Speaker 4: to measure it. And so, you know, you talked about
Speaker 4: market based inflation expectation. There's a lot going on in
Speaker 4: those market based expectations, including liquidity and a bunch of
Speaker 4: other things, you know.
Speaker 3: Survey based expectations.
Speaker 4: It turns out you know, if you ask someone a
Speaker 4: survey question and you bias it in any way, then
Speaker 4: they end up with different biases, and different surveys have
Speaker 4: different ways of managing that, and so I think it
Speaker 4: really matters. But I don't think our metrics are very good.
Speaker 4: And my shorthand, for whatever it's worth, is I think
Speaker 4: there are two competing things in every business's mind, in
Speaker 4: every consumer's mind about inflation. One is what is it today?
Speaker 4: Because the best indicator of tomorrow is today. And the
Speaker 4: second is do you trust the Federal return it to
Speaker 4: two percent in the long term?
Speaker 3: And it's almost that simple of a question.
Speaker 4: You try And as long as you trust the Fed
Speaker 4: in the long term and market expectations are reasonable proxy
Speaker 4: for that, then I think what you should expect for
Speaker 4: near term inflation is some combination of today versus tomorrow,
Speaker 4: and you get there over time. And if the if
Speaker 4: you go back to the eighties and nineties, after Volcar
Speaker 4: and through green Span, you know, we didn't go to
Speaker 4: two percent inflation in nineteen eighty six or eighty seven
Speaker 4: or eighty eight. We were at four, and then we
Speaker 4: were at three and a half, and then we're at three,
Speaker 4: and then we're two and a half. I think you
Speaker 4: get there over time. You don't get there quite as
Speaker 4: quickly as sort of a purest model would suggest.
Speaker 2: So let me get a little wonky with you, since
Speaker 2: you brought up the two percent target. Former Federal Reserve
Speaker 2: Vice Chairman Roger Ferguson, I believe, did a paper on
Speaker 2: the two percent inflation target, and he was kind of
Speaker 2: critical of it, saying it's a made up round number
Speaker 2: that comes from New Zealand in the nineteen eighties. It's
Speaker 2: not relevant to a modern era versus it was. But
Speaker 2: to kind of flesh out his thoughts a little more, Hey,
Speaker 2: the post financial crisis period, really, the post nine to
Speaker 2: eleven period was driven in large part by very low
Speaker 2: monetary policy, very low rates, and then the pandemic led
Speaker 2: to the single biggest fiscal stimulus at least as a
Speaker 2: percentage of GDP since World War Two. So we had
Speaker 2: that regime change from monetary to fiscal. Is two percent
Speaker 2: still the right target. We couldn't get up to two
Speaker 2: percent during the twenty tens where deflation was a bigger concern.
Speaker 2: Now you have the Okay, admittedly the pig is mostly
Speaker 2: through the python, but we still have all this fiscal
Speaker 2: stimulus around is two percent? Like why two? Why not
Speaker 2: two and a half or three?
Speaker 4: So I would ask the first question is is it
Speaker 4: a good idea to have a target? And I'd want
Speaker 4: to make the case that it's a really good idea
Speaker 4: to have a target, because it anchors the public in
Speaker 4: terms of where you're trying to go, and it builds
Speaker 4: commitment and credibility among the FMC that you'll take the
Speaker 4: initiatives you need to take when you're absent from a target.
Speaker 4: In terms of what should the target be, the original
Speaker 4: debate in the nine was actually between zero and two.
Speaker 4: Zero was price stability. That's price stability, right, and two
Speaker 4: was an alternative that gave you a little bit of room.
Speaker 4: Eventually they settled on to our predecessors, and as you
Speaker 4: were suggesting, pretty much every central bank in the world
Speaker 4: has settled onto and by the way, we've delivered to
Speaker 4: or just around two for almost all of the last
Speaker 4: thirty years. And so it doesn't strike me that it's
Speaker 4: a ridiculous target. Is an achievable target, it's a global target.
Speaker 4: It makes sense to people. By the way, you know,
Speaker 4: we're at two point three percent. I think headline right, now,
Speaker 4: so we're not even very far away from it, so
Speaker 4: I see no reason to move the target. Of course,
Speaker 4: you could argue about whether two is the right number,
Speaker 4: two point two or one point eight or some other number. Also,
Speaker 4: two things about that one is one of the reasons
Speaker 4: why you go with two as opposed to zero is
Speaker 4: you don't like deflation. Deflations when prices go down every
Speaker 4: year and then no one wants to buy anything is
Speaker 4: going to be cheaper tomorrow, and two gives you a
Speaker 4: little bit of room against deflation. It's also the case
Speaker 4: that there's some mismeasurement. Take encyclopedias for example. Let's assume
Speaker 4: encyclopedias were in the index in the nineties. Well, they're
Speaker 4: free today, they're on your phone, and so that's deflation
Speaker 4: that doesn't show up in the numbers, and so it
Speaker 4: just gives you a little bit of room there. So
Speaker 4: that's why too, you know, you sort of said we're
Speaker 4: not at two today. We weren't at two a decade ago.
Speaker 4: And I think I personally do think of false precision
Speaker 4: as being a concept worth considering here, which is I
Speaker 4: definitely didn't criticize myself that much when we're at one
Speaker 4: point eight. I mean, you're trying to get to two.
Speaker 4: The economy is not something that you manage. So finally
Speaker 4: that in each and every month of each and every
Speaker 4: year inflation comes in in exactly too. That's something that
Speaker 4: doesn't exist. Two's a target, and if you're off too
Speaker 4: on the above or on the below, you try to
Speaker 4: manage yourself toward it, and you recognize that you're not
Speaker 4: always going to be right on it right.
Speaker 2: It reminds me of the old joke economists use decimal
Speaker 2: points to reveal they have a sense of humor.
Speaker 3: So something has something has to make that case.
Speaker 2: So let's pivot a little bit to the Richmond Federal Reserve.
Speaker 2: The Federal Reserve Bank of Richmond District covers South Carolina,
Speaker 2: North Carolina, Virginia, d C, West Virginia, and Maryland. That
Speaker 2: seems like a fairly unique group of states, especially with
Speaker 2: the nation's capital right in the middle. Tell us a
Speaker 2: little bit about what makes that region so special.
Speaker 4: So three things I like about it. One is DC
Speaker 4: Metro unique. There's no other place in the country like that, obviously,
Speaker 4: and all that's implied there. Second is we have nine
Speaker 4: or ten i'll call them really fast growth New South regions, communities,
Speaker 4: cities Charlotte, Greenville, Raleigh, Richmond, Northern Virginia. They're really very,
Speaker 4: very vibrant, fast growing. You know, North and South Carolina,
Speaker 4: for example, are two of the four fastest growing states
Speaker 4: in terms of population in terms of housing growth over
Speaker 4: the last several years. And then you've got a lot
Speaker 4: of rural markets, and that would be you know, west
Speaker 4: of the Appalachian part of the district in North Carolina,
Speaker 4: West Virginia, and Western Virginia. But that would also include
Speaker 4: up and down you know, I ninety five. There are
Speaker 4: a lot of small towns there, and so I kind
Speaker 4: of think about as three different economies, and I think
Speaker 4: it's very interesting to be able to represent a community
Speaker 4: with three so very different economies.
Speaker 2: You know, you mentioned Charlotte. My office has we have
Speaker 2: dozens of office across the country, but we have three hubs,
Speaker 2: New York, Chicago, and Charlotte. And every time I visit Charlotte,
Speaker 2: it feels like the city is twice the size it
Speaker 2: was a year earlier. The area it's become a finance
Speaker 2: center and a banking center. How do you look at
Speaker 2: such a diverse area where some parts are a little
Speaker 2: more rural, a little more sleepy, and growth is just
Speaker 2: normal agricultural progression, and other areas are just absolute boom towns.
Speaker 4: Well, the biggest thing I try to do is show
Speaker 4: up in all of them.
Speaker 2: And so you go to a lot of parts of
Speaker 2: your district all the time.
Speaker 3: Right everywhere.
Speaker 4: And if you're bored on the website, they've even got
Speaker 4: a map, kind of a ware's waldo. But no every
Speaker 4: I mean, last week I was in Marion and Roanoke, Virginia.
Speaker 4: Then I was in Arlington, Virginia. Then I was in
Speaker 4: d C. And I'm trying to get into the big cities,
Speaker 4: into the small towns, because you actually do hear about
Speaker 4: the economy differently in big cities versus small towns. For example,
Speaker 4: labor markets. You know, the the labor markets in the
Speaker 4: small towns are unbelievably stressed still, and if you have
Speaker 4: a national conversation, you say, hey, labor markets sort of
Speaker 4: in balance unemployment's four point two percent, wage growth sort
Speaker 4: of moderate. It's still the case in these small towns
Speaker 4: that they can't find workers at restaurants and certainly in
Speaker 4: manufacturing facilities. You also hear, you know, you get a
Speaker 4: lot easier access to small businesses when you're in the
Speaker 4: small town. So when I was in Marion last week,
Speaker 4: I actually spent an hour and a half just wandering
Speaker 4: up and down main Street and I talk to every
Speaker 4: small business on main street about you know, what does
Speaker 4: demand look like? Are you seeing any impact from tariffs?
Speaker 4: What are you going to do with your pricing? So
Speaker 4: it's a forcing device to help you see that part
Speaker 4: of the economy, which of course employs so many And
Speaker 4: so I think if you're on the ground, you'll see
Speaker 4: and I've got red parts and blue parts and purple parts.
Speaker 3: Statisticts.
Speaker 4: You hear what's on people's minds in very different ways
Speaker 4: based of where you are, and I really appreciate that
Speaker 4: part of my district.
Speaker 2: How do you balance the anecdotes you hear from the
Speaker 2: man or woman in the street, the business owner, the shopkeeper, whatever,
Speaker 2: with the hard data that you know, both the Richmond
Speaker 2: Fed and the Federal Reserve proper have an enormous staff
Speaker 2: of researchers crunching numbers. How do you balance data versus anecdote?
Speaker 4: Well, so the data is better than the anecdotes because
Speaker 4: you know it's a bigger sample. It's done in a
Speaker 4: serious and approach statistically appropriate. It also comes in about
Speaker 4: six weeks late and is revised three times, and so
Speaker 4: the data really matters. But if you just count on
Speaker 4: the data, you're going to miss turning points and you're
Speaker 4: going to miss explanations. And so I don't make the
Speaker 4: mistake of talking to one company and saying, oh, okay,
Speaker 4: everything in the data is wrong. But I do try
Speaker 4: to understand what the data is telling me by testing,
Speaker 4: you know, with the conversations we're having in the field,
Speaker 4: and so you know, a good example would have been
Speaker 4: May first of twenty twenty when I talked to a
Speaker 4: real estate developer in western Virginia who was telling me
Speaker 4: that Tennessee has just opened the malls in Bristol and
Speaker 4: they're packed, and of course Virginia was still closed down.
Speaker 4: And that was my first indicator that you're going to
Speaker 4: see this big wave of spending when the lockdowns started
Speaker 4: to open up. And so that's a turning point that
Speaker 4: you wouldn't otherwise have gotten if you weren't in the markets.
Speaker 4: We heard the same thing with household furnishings. Yeah, there's
Speaker 4: a big boom and furniture during COVID, but about twenty
Speaker 4: twenty two, it backed off. We heard that from the
Speaker 4: furniture manufacturers, we before you saw that in the data.
Speaker 4: And then I think explanations matter a lot too. And
Speaker 4: if you're trying to understand how it could be that
Speaker 4: we've had all this news from Washington, yet the unemployment
Speaker 4: statistics don't seem to show that much of a tick
Speaker 4: up in unemployment in Washington, well, there are lots of explanations,
Speaker 4: including how those programs have been rolled out and what
Speaker 4: the timing of it is. And so if you're in
Speaker 4: the market talking about we actually understand the data in
Speaker 4: a fundamentally more sophisticated way.
Speaker 2: Since you mentioned the pandemic, let's talk about two issues
Speaker 2: post pandemic, wages and real estate, and we'll just start
Speaker 2: with there have been substantial wage gains across every economic strata,
Speaker 2: and impressively very much so in the bottom half of
Speaker 2: earners since the pandemic, although that is now starting to
Speaker 2: slow down. How do you look at the wage situation
Speaker 2: as part of employment and what's happened with that trend
Speaker 2: towards wage pressures beginning to ease off.
Speaker 4: Well, I do think you've described accurately. You know, what's
Speaker 4: happened to wages. It's definitely bigger increases at the lower
Speaker 4: end and less at the higher end. You know, I
Speaker 4: should add that inflation also hits lower income earners the
Speaker 4: hardest because they spend the greatest amount of their pay,
Speaker 4: and so nobody has this mental ledger that says, my
Speaker 4: wages went up x percent, my prices went up y percent,
Speaker 4: and so i'm you know, it's not like operating margin
Speaker 4: for a business. Those are two different ledgers in humans minds,
Speaker 4: And so to a lot of lower income people doesn't
Speaker 4: feel like their wages have gone up as much because
Speaker 4: inflation's gone up, and also because they don't they discount
Speaker 4: the wages when they measured against inflation. You know, going forward,
Speaker 4: it definitely looks like we've got a labor market that
Speaker 4: is much more in balance, maybe even starting to loosen,
Speaker 4: than the one we had a year or two or
Speaker 4: three years ago. You still hear tightness, as I said,
Speaker 4: in small towns. You definitely hear it in the skilled trades.
Speaker 4: I think there are a set of professions out there
Speaker 4: that used to be a wall with employees that now
Speaker 4: seem to be systemically short of employees. And you know,
Speaker 4: a lot of that skilled trades, but I'd also put
Speaker 4: a lot of the care professions, nurses, teachers, elder care, childcare.
Speaker 4: A lot of people found those professions to be pretty
Speaker 4: unattractive during COVID and moved into other jobs, and there
Speaker 4: hasn't been a way, you know, to replace them. And
Speaker 4: there's not that much money to available to increase the
Speaker 4: compensation to account for it. So you hear shortages there.
Speaker 4: You hear shortages in state and local government still. So
Speaker 4: there's still places where the impact of the pandemic on
Speaker 4: the labor market has not yet. We're not back to
Speaker 4: where we were at the beginning, and you know, some
Speaker 4: combination of training and development of people and compensation of
Speaker 4: people is going to have to happen if we're going
Speaker 4: to staff these appropriately.
Speaker 2: So let's talk about remote work and both commercial real
Speaker 2: estate space and residential real estate. The US continues to
Speaker 2: have a substantial number of workers that are either high
Speaker 2: or full time remote. I used to be in the
Speaker 2: city four or five days a week. Now I'm in
Speaker 2: the city two or three days a week. If you
Speaker 2: were in Bloomberg today, I would have been in Bloomberg.
Speaker 2: But it didn't make sense to come in to have
Speaker 2: a remote conversation, and the US continues to have a
Speaker 2: higher level of remote work than other similar industrialized societies
Speaker 2: like Europe. What's going on with remote work? What does
Speaker 2: this mean for FED policy? What does this mean for
Speaker 2: a variety of different aspects. It seems to be fading
Speaker 2: as a topic, but it's still a pretty significant issue.
Speaker 4: We have flexibility we didn't know we had. That's where
Speaker 4: I start, and you can't bury that. And so I
Speaker 4: think there's a whole bunch of workers in a whole
Speaker 4: bunch of days who found out that, like you and
Speaker 4: like May, you could work from home this day as
Speaker 4: opposed to working somewhere else. It's also true that there's
Speaker 4: a bunch of employees who discovered that they actually prefer
Speaker 4: to be at home rather than come into the office.
Speaker 4: By the way, there's another set that would prefer to
Speaker 4: come in the office. But there's certainly a segment there.
Speaker 4: And so we're in a marketplace. People will compete it out,
Speaker 4: and there are executives who believe passionately that their business
Speaker 4: is not going to deliver unless their people are there
Speaker 4: five days a week, every week, and their businesses who
Speaker 4: believe they'll get access to better people if they just
Speaker 4: allow them to be remote. And those two often those
Speaker 4: two are in the same sector, and so they'll compete
Speaker 4: it out. One will have lower property costs, one will
Speaker 4: have higher collaboration. We'll see what happens. One thing I
Speaker 4: tried to look at when all this started was how
Speaker 4: did we ever end up with the five hour, five
Speaker 4: day a week, forty hour work week. And the answer
Speaker 4: is that was General Motors and Alfred Sloan back in
Speaker 4: the mid twenties just decided it, and five or ten
Speaker 4: years later everybody was doing it. But none of us
Speaker 4: who were doing it thought that was perfect if we
Speaker 4: stopped to think about it. It's just what we did.
Speaker 4: And so you know, different sectors, different businesses, they'll evolve
Speaker 4: toward different models. I do think their implications, as you say,
Speaker 4: on real estate, on the residential side, if some set
Speaker 4: of people are going to spend more of their time
Speaker 4: in their house, then they're going to value their house more.
Speaker 4: They're going to value their office, they're going to value
Speaker 4: their space, their garden, whatever. And so we saw that
Speaker 4: during COVID, people got shut up in their house, they
Speaker 4: decided they no longer liked their house. They also decided
Speaker 4: they didn't like their roommates, and so the economists call
Speaker 4: that household formation. So you have a lot more households
Speaker 4: out there for the same amount of houses, and that's
Speaker 4: what's led to the price increase that we've had in housing.
Speaker 4: And unless we build a lot more housing, you're going
Speaker 4: to have that out there for some time.
Speaker 3: It's a bigger part of the basket.
Speaker 4: And maybe you know, public transit or parking is a
Speaker 4: lower part of the basket, but housing will be a
Speaker 4: bigger part of the basket. On the commercial real estate side,
Speaker 4: you know, folks are still trying to adapt, and you know,
Speaker 4: it's much less flexible than the housing side because some
Speaker 4: of the space is very much built for purpose, built
Speaker 4: for an institution at least for fifteen years, as you know.
Speaker 3: And so I think think we're still midway.
Speaker 4: Through an adjustment process where some amount of that commercial
Speaker 4: real estate is used more because people come back to
Speaker 4: the office, some is redeployed into other uses, whether it
Speaker 4: be anything from data centers to residential, and some has
Speaker 4: eventually taken off the market. But I think I think
Speaker 4: we're still very much mid process on that.
Speaker 2: So let's talk a little bit about real estate, and
Speaker 2: in particular residential real estate. We seem to have this
Speaker 2: chicken and egg problem where prices are up because there's
Speaker 2: so little supply on the market. And while some of
Speaker 2: that is a little bit of nimbi, and some of
Speaker 2: that has been post financial crisis builders tilted towards multifamily
Speaker 2: and apartments versus single family homes. But the largest chunk
Speaker 2: seems to be the golden mortgage handcuffs. Something like sixty
Speaker 2: seventy percent of people have mortgages under five percent and
Speaker 2: some huge, crazy number under four percent mortgage rates. So,
Speaker 2: on the one hand, if we lower yields too fast, well,
Speaker 2: that could set off another round of inflation. On the
Speaker 2: other hand, all of this supply is locked up, and
Speaker 2: either we're going to wait for those people to age out,
Speaker 2: or if rates come down enough, they could trade up
Speaker 2: or trade to a downsize or whatever, but move to
Speaker 2: a different property. How does the FED think about this,
Speaker 2: you know, sort of conundrum where damned if you do,
Speaker 2: damned if you don't.
Speaker 3: Well, I think I wouldn't I wouldn't buy.
Speaker 4: I do buy your story that there are a lot
Speaker 4: of people who have decided not to move because they
Speaker 4: can't give up their mortgage. But I don't buy the
Speaker 4: story that if all we did was lower rates, then
Speaker 4: they would all give up their mortgage and the housing
Speaker 4: market would free up, because every one of those people
Speaker 4: who moved is a seller and a buyer, and so
Speaker 4: they're going to be increasing their demand at the same
Speaker 4: time that they're increasing supply. So you're still going to
Speaker 4: have a shortage of supply versus demand. I should also
Speaker 4: note that just because we raise lower short term rates
Speaker 4: as necessarily lower mortgage rates, as we learned in the
Speaker 4: fourth quarter of last year. But I think again, the
Speaker 4: demand for housing is much higher, and it's much higher
Speaker 4: because the generations decided they want a house and household
Speaker 4: formation as I talked about earlier in people valuing their house.
Speaker 4: As you say, we underbuilt housing for a generation coming
Speaker 4: out of the Great Recession, and so we have more
Speaker 4: demand than supply. The answer to that is to build
Speaker 4: more supply. And as in my district, if you drive
Speaker 4: down ninety five and you look at Wilson or Smithfield
Speaker 4: or Clayton or Rocky Mount, you know these are exurban
Speaker 4: areas that are not Raleigh, but not that far from Raleigh.
Speaker 4: You see you know, development after development of two hundred
Speaker 4: and seventy five to three hundred and twenty five thousand
Speaker 4: dollars houses, you know, going up in what used to
Speaker 4: be farmland there. If you drive to exurban Charlotte or
Speaker 4: Greenville or Richmond, you'll see the same thing. I mean,
Speaker 4: houses are getting built. But there are communities, you know,
Speaker 4: Metro DC would be one of them where you don't
Speaker 4: see housing getting built. And so you know, you have
Speaker 4: to ask the question of why that is part of
Speaker 4: its cost, part of its land, and part of its
Speaker 4: you know, resistance to growth by the inhabitants of various markets.
Speaker 4: And it again, one of the benefits of having the
Speaker 4: six states that have is you can see places that
Speaker 4: are growing and housing is getting built, and you can
Speaker 4: see places where it's not.
Speaker 2: So is it fair to say the headwind for putting
Speaker 2: up more houses is not a national set of policies
Speaker 2: but mostly state, local, regional both regulations and just hey,
Speaker 2: you know they the fewer houses that are built, the
Speaker 2: more my house is worth. There's a little bit of
Speaker 2: self interest amongst the people who oppose more home construction.
Speaker 4: Well, what I keep saying is we're in a competition
Speaker 4: for developers. There are only so many There are only
Speaker 4: so many construction people, and you want them to come
Speaker 4: to your neighborhood and build houses in your places.
Speaker 3: So how do you do that.
Speaker 4: Well, all of your local regulation and policies matter, permitting zoning,
Speaker 4: amount of time to get approvals, certainty as to construction time.
Speaker 4: So that's one big piece of it. Another big piece
Speaker 4: of it is land availability. And once you start thinking
Speaker 4: about land availability, you almost don't stop. I mean, I
Speaker 4: drive into some community colleges and they've got a huge
Speaker 4: plots of land, and then I find out that the
Speaker 4: state doesn't allow the building of dorms on community college campuses,
Speaker 4: and you go, now, okay, wait a second, you can
Speaker 4: get student housing built. Why can't we get that built.
Speaker 4: You go to some of these older world towns that
Speaker 4: have been depopulated over the years, and they've got all
Speaker 4: this land that's dilapidate housing, but they can't fix it
Speaker 4: because there's absentee landowners.
Speaker 3: I mean, once you start.
Speaker 4: Thinking about the role of land in making this attractive
Speaker 4: for developers, you almost can't stop thinking about it. And
Speaker 4: I think that really is the lever of communities can
Speaker 4: provide real assurance that they can provide land, and that
Speaker 4: land can get built on at a predictable and reasonable
Speaker 4: time period.
Speaker 3: Think, then it.
Speaker 2: Works really really interesting. So now let's pivot to your
Speaker 2: work on the FOMC and the state of monetary policy today.
Speaker 2: Starting with let's talk a little bit about that fiscal
Speaker 2: stimulus during COVID. If you total all the programs up,
Speaker 2: CARES Act one and two under President Trump, CARES Act
Speaker 2: three under President Biden, all the Infrastructure Bill, all the
Speaker 2: other ten year legislative acts that pass some form of
Speaker 2: fiscal stimulus, you know, you can get that up to
Speaker 2: about four trillion dollars or more. Uh, that's a huge,
Speaker 2: huge amount of money coursing through the system. How did
Speaker 2: that impact inflation? And is it fair to say that
Speaker 2: maybe transitory has gotten a bad rap because it seemed
Speaker 2: to be kind of transitory. It just transitory took longer
Speaker 2: than everybody expected.
Speaker 4: Well, though there's been a lot of papers and about
Speaker 4: what drove the inflation, you know, to me, it's in
Speaker 4: all of the above. I mean, you had a surge
Speaker 4: and demand that came from fiscal policy and monetary policy
Speaker 4: and vaccines. You know, as people got out of their
Speaker 4: house and felt the freedom to spend. You had constraints
Speaker 4: in supply which came from you know, labor constraints, people
Speaker 4: driven by the crisis, by the health crisis, maybe labor
Speaker 4: constraints caused by policy and supply chain constraints. As demand
Speaker 4: sort of overwhelmed supply, and so then you saw you know,
Speaker 4: demand surge well and excess of supply that led prices up.
Speaker 4: I think the most interesting question for entree policy is
Speaker 4: why did it last so long? Because you know, to
Speaker 4: your point on transitory, okay, that's fine, you have more
Speaker 4: demand than supply. Expectations are anchored, so price went up,
Speaker 4: they should have come back down. And I just think
Speaker 4: it goes back to what I described earlier as how
Speaker 4: I think about people's inflation expectations, which is it's part
Speaker 4: today in part tomorrow, and it just takes time to
Speaker 4: get back to tomorrow after you've had a surge today. The
Speaker 4: real life way to think about it is, Okay, now
Speaker 4: you're you know, somebody's lawn service, and you don't really
Speaker 4: have big cost increases, but everybody else has raised their price.
Speaker 4: Maybe you look around you go, huh, maybe I can
Speaker 4: raise my price. And so there's a lot of attempts
Speaker 4: to raise prices that go through in the aftermath of
Speaker 4: an inflationary episode that might not have been they might
Speaker 4: have the courage to do without an inflationary episode, And
Speaker 4: so I think it was this. The inflation way that
Speaker 4: we saw was definitely time bound. I mean, we have
Speaker 4: seen the supply chains heel, we've seen people back in
Speaker 4: the workforce, and we have seen prices come down. But
Speaker 4: the question of what the definition of transitory is is
Speaker 4: challenging because the word first got used, I think in
Speaker 4: March twenty one or April twenty one, and now it's
Speaker 4: four years later, and so a lot of people think
Speaker 4: transtory means like a minute, where in fact, the original
Speaker 4: meaning of it was in our lifetimes. And so probably
Speaker 4: the right definition is somewhere between those two.
Speaker 2: On a long enough time line, everything that's transitor. You
Speaker 2: have a quote from earlier this year that I'm a
Speaker 2: big fan of because I have a buddy who is
Speaker 2: a commodities trader and he says the exact same thing
Speaker 2: all the time, and the quote is the cure for
Speaker 2: high prices is high prices. Explain that because I'm just
Speaker 2: such a fan of that line.
Speaker 4: Well, so it's a great economist line. It has two
Speaker 4: meanings and both of them matter. One is that if you,
Speaker 4: as a consumer get high prices, the first thing you
Speaker 4: want to do is look for an alternative. Maybe you
Speaker 4: go to private label, maybe you go to from beef
Speaker 4: to chicken, maybe you go from a department store to
Speaker 4: a Walmart. But you're looking for some are alternative. And
Speaker 4: so if a company raises its price is too high,
Speaker 4: then its customers are going to do something else and
Speaker 4: that'll teach the company that that price is too high.
Speaker 4: The other version of it is a supply side point,
Speaker 4: which is that if prices are high and successfully passed on,
Speaker 4: then new competitors will come in, you know, to increase
Speaker 4: or lower prices and so and I really want to
Speaker 4: say this has happened. I mean, this has happened in
Speaker 4: this economy. If you look at earnings reports from all
Speaker 4: the major retailers, you know you'll hear this. You know,
Speaker 4: customers are tapped out, customers are trading down. You can
Speaker 4: see a big move in terms of where people are
Speaker 4: buying their groceries today, private label, e commerce, like I said,
Speaker 4: beef to chicken, all these things are happening. And I
Speaker 4: think it's because, you know, consumers having gotten through the
Speaker 4: COVID period where they were exhausted. It was all coming
Speaker 4: at once, and by the way, they had lots of
Speaker 4: money because of repress spendings or in COVID or elevated
Speaker 4: stock market or stimulus checks. They just spent it and
Speaker 4: they paid it, and that's what we got the inflation
Speaker 4: of twenty twenty two.
Speaker 3: We're not in a period.
Speaker 4: Where consumers feel like they have extra money. And so
Speaker 4: those people who are out there trying to raise prices
Speaker 4: for whatever set of good and bad reasons, they're facing
Speaker 4: a consumer that doesn't want to pay it now, and
Speaker 4: it's got the time and the mental energy to make choices,
Speaker 4: and so I think you know that do that will
Speaker 4: fix high price is over time.
Speaker 2: So during the pandemic, we kind of pivoted from a
Speaker 2: service driven economy to very much a stuck at home,
Speaker 2: can't travel, go to restaurants, go to sporting events, so
Speaker 2: we're gonna consume more goods. That very much was a
Speaker 2: key driver of inflation, along with all these other issues
Speaker 2: including snarled supply chains. Feels like that's mostly returned back
Speaker 2: to normal. The Summer of Revenge travel everybody seems to
Speaker 2: be out about, at least in my area. I book
Speaker 2: restaurant reservations three weeks in events. So we seem to
Speaker 2: be in a place that's kind of normalized. How is
Speaker 2: the FMC looking at the state of the economy today?
Speaker 2: Are we in a normal post inflation environment or is
Speaker 2: there something else that we're going on that we should
Speaker 2: be aware of.
Speaker 4: Well, I think there's today and tomorrow. Today we're in
Speaker 4: the closing stages of bringing the economy back to normal.
Speaker 3: That's how I put it.
Speaker 4: I mean, unemployment's four point two, that's a historically low number.
Speaker 4: Inflation headline two point three, that's very close to a
Speaker 4: two percent target GDP if you adjust for the one
Speaker 4: timers that we're in the first quarter is still growing
Speaker 4: in the two and a half percent range. So think
Speaker 4: of it as a very strong, stable economy. The challenge
Speaker 4: we all have is the uncertainty about you know, where
Speaker 4: we're headed, and you know, you or I could articulate
Speaker 4: an upside to that or a downside of that. I'm
Speaker 4: not making a comment on it, but it is elevated uncertainty.
Speaker 4: It's what I was describing as the fog. And so
Speaker 4: you know, we're sort of on the brink of a
Speaker 4: different environment, and that different environment will have different terarif
Speaker 4: rates and different levels of immigration and different levels of
Speaker 4: government spending and different levels of regulation and different energy policy.
Speaker 4: You know, all that is I think locked in. I mean,
Speaker 4: we know the direction, we just don't know the destination.
Speaker 4: And it turns out people kind of I want to
Speaker 4: know where they're headed before they pack, and so that's
Speaker 4: that's the challenge we've got right now, is just determining
Speaker 4: what's the destination so that you know, businesses and consumers
Speaker 4: can make the choices they make.
Speaker 2: So, given this fog, driven in large part by uncertainty
Speaker 2: over tariffs, how does the FMC make policy if there's
Speaker 2: such a lack of clarity as to we understand today?
Speaker 2: But really, tariffs are on, tariffs are off. Wait, European tariffs,
Speaker 2: oh wait, we're going to put them on hold until
Speaker 2: mid July. That must be incredibly challenging to make long
Speaker 2: term policy decisions in light of these very short term
Speaker 2: policy swings.
Speaker 4: I'd say, sometimes our job is very straightforward and sometimes
Speaker 4: it's not. It's very straightforward when unemployment's high, inflation is loow,
Speaker 4: because you know which direction to go, and it's you know,
Speaker 4: relatively straightforward. When the forecast seems pretty clear, that you
Speaker 4: have stability and confidence in the forecast. You know, in
Speaker 4: today's world, neither one of those is true. I mean,
Speaker 4: inflation has come down but is not yet at our target.
Speaker 4: Employment unemployment is low, but either risk to it, and
Speaker 4: the forecast is unclear, and so you have to reflect
Speaker 4: on where you are. You know, where I think we
Speaker 4: are is modestly restrictive. In other words, a four point
Speaker 4: three percent overnight rate is constrained the economy a modest amount,
Speaker 4: but not a significant amount at a time where inflation
Speaker 4: is still over our target and unemployment is low, And
Speaker 4: then you just have to I mean, you could choose.
Speaker 4: If you had conviction in the forecast, then you might
Speaker 4: choose to move whichever way you felt you had to
Speaker 4: move given that forecast. But if, like me, you don't
Speaker 4: have that much conviction in the forecast, then you say,
Speaker 4: let's wait and see where we go.
Speaker 2: So let's talk about conviction. Another quote of yours that
Speaker 2: I'm fond of is monetary policy, and I'm going to
Speaker 2: paraphrase monetary policy needs to balance both conviction and humility.
Speaker 4: Discuss well, my dad said, used to say, Tom, I
Speaker 4: want you to be humble because I know you well
Speaker 4: and you have a lot to be humble about. And
Speaker 4: I think the point he was making is don't be
Speaker 4: too full of yourself here, and so you could, you know,
Speaker 4: stand up pound the table and say, you know, by God,
Speaker 4: I see where this is going, and inflation's rising or
Speaker 4: unemployments rising, and therefore we need to move you know,
Speaker 4: left or move right and support of one of those
Speaker 4: parts of our mandate. I mean, I listened to my colleagues.
Speaker 4: You have many different points of view on this. I'm
Speaker 4: humble enough about my own forecasting ability. It just makes
Speaker 4: me think that, you know, I'll learn more. I'll learn
Speaker 4: more with time.
Speaker 2: So talking about your colleagues and the rest of the
Speaker 2: folks on the FMC board, one of the things I've
Speaker 2: noticed through history is that they are very deliberate. They
Speaker 2: don't surprise the markets with anything. Everything is always very calculated.
Speaker 2: And hey, we're going to be raising rates in a
Speaker 2: few months. Hey next month. Look at the dot plot.
Speaker 2: We're looking at PC and CPI. Okay, here it comes.
Speaker 2: There are never shocks to the market. At the same time,
Speaker 2: the criticism has been seems to be a little late
Speaker 2: to the party sometimes. We saw that spike of inflation
Speaker 2: late twenty twenty early twenty one. It took the FED
Speaker 2: a while before they began raising rates, and then CPI
Speaker 2: peaked June twenty twenty two, took a while before we
Speaker 2: went on to pause and then cutting. How do you
Speaker 2: balance the lack of clarity, the need for humility with
Speaker 2: the latest noisy data and trying to be not too
Speaker 2: far behind what you're actually is happening on the ground.
Speaker 4: Well, so you started with, you know, being methodical, and
Speaker 4: that's probably accurate. Bernanki had the insight which he published
Speaker 4: back in the early two thousands that markets can do
Speaker 4: a lot of work for us if they have a
Speaker 4: good sense of the path, then we don't have to
Speaker 4: do as much in policy because they'll you know, work
Speaker 4: the rate path for you. And I think there is
Speaker 4: some effort made to try to communicate clearly certainly why
Speaker 4: you know, I and my peers try to talk as
Speaker 4: much as we do to see if we can't you
Speaker 4: bring some clarity to that situation. And so I think
Speaker 4: it's fair to say, you know, trying to do it,
Speaker 4: but we will move faster than people expect when we
Speaker 4: need to, as we proved in twenty twenty two, in
Speaker 4: terms of getting it right, I'll just go back to
Speaker 4: what I said about false precision a little bit ago,
Speaker 4: which is, I think we're always going to be wrong.
Speaker 4: I mean, you know, you're never going to precisely, you know,
Speaker 4: get the peak of inflation or the peak of unemployment
Speaker 4: or the trough of either. You make your best efforts,
Speaker 4: and I think if the standard is that you know
Speaker 4: every decimal on every forecast actually played out, then I
Speaker 4: think we're all guilty of missing that.
Speaker 2: Yeah, to say say the very least. We talked earlier
Speaker 2: about transitory, Let's talk for a moment about the nineteen seventies,
Speaker 2: which was clearly very structural. How similar are the twenty
Speaker 2: twenties to the nineteen seventies and how different are they.
Speaker 2: As someone who was a kid during that era, I
Speaker 2: kind of remember just being parents being freaked out about stuff.
Speaker 2: I remember going to get gas. I had a little
Speaker 2: side business mowing lawns, and the guy at the gas
Speaker 2: station asked me, you do you have an even license
Speaker 2: plate or an odd license I don't know, I'm twelve.
Speaker 2: I just need a gallon of gas to mow the lawn. Yeah,
Speaker 2: So how similar is is are the twenty twenties and
Speaker 2: what are the key differences.
Speaker 4: So there's a chart that makes the rounds that you know,
Speaker 4: adjust the scales, but sort of puts the sixties and
Speaker 4: seventies up against you know, the last five years and
Speaker 4: says there's just about to be another big bout of inflation.
Speaker 4: And you know, I find that chart annoying, but you know,
Speaker 4: I understand the fear. You know, a reminder for all
Speaker 4: your listeners that in the early seventies there's a strong
Speaker 4: historic sense that there was a set of mistakes made
Speaker 4: by the FED of not being tough enough on inflation
Speaker 4: that were then exacerbated in the middle and late seventies
Speaker 4: by two big oil spike price spikes. And you know,
Speaker 4: I can't predict an oil price bike, and neither can
Speaker 4: anybody else, and so who knows, you know, how that'll
Speaker 4: play out. The fact that I've found interesting about the
Speaker 4: seventies is how elevated long term bond rates were, you know,
Speaker 4: how the term premium was, and basically how much inflation
Speaker 4: expectations were embedded in long term rates. And that's an
Speaker 4: interesting thing to look at because it sort of gets
Speaker 4: to this question of expectations. We had price shocks like
Speaker 4: the oil price spike in seventy four or the one
Speaker 4: in seventy eight, and who knows whether we'll have those again.
Speaker 4: But those price shocks didn't just affect today's prices. It
Speaker 4: also affected the market's views on tomorrow's prices. And I say,
Speaker 4: I would just say that's a huge difference between the
Speaker 4: seventies and today's that you know, metrics of long term
Speaker 4: expectations feel very grounded, even if you do have short
Speaker 4: term price backs. I think that's because of an expectation
Speaker 4: that the Fed will do what we need to do
Speaker 4: if you were to see that inflation, which I hope
Speaker 4: we validated in twenty twenty two.
Speaker 2: So it seems like the street, Wall Street in particular,
Speaker 2: Wall Street and the bond market in particular have been
Speaker 2: erroneously forecasting Fed rig cuts for I don't know, two three,
Speaker 2: maybe even almost back to when the FED started raising
Speaker 2: rates this cycle. What is the Fed looking for in
Speaker 2: order to feel comfortable? Okay, we've wrestled inflation into submission
Speaker 2: and the economy is starting to show a little signs
Speaker 2: of some minor stress let's take rates down one or
Speaker 2: two more times. I'm not asking you for a date,
Speaker 2: I'm asking you for what are you looking at? What
Speaker 2: is the FMC looking at? That would make them comfortable
Speaker 2: saying all right, we could we could ease a little
Speaker 2: bit off the brake and tap the accelerator a little bit.
Speaker 4: Okay, So first of all, I wouldn't be so tough
Speaker 4: on the professional forecasters. Another joke is that you know,
Speaker 4: economic forecasting was created to make weather forecasting look good.
Speaker 2: I heard it to make to make astrologists look good.
Speaker 2: But another and actually, the weather forecasters are getting better
Speaker 2: and better.
Speaker 3: That's the difference, as are the economics.
Speaker 4: But whenever, whenever you look at the market quote unquote
Speaker 4: market's view on the number of rate cuts, you have
Speaker 4: to remember that in that assessment includes tail risks. And
Speaker 4: so you know, if you think at any given point
Speaker 4: in time, there's a twenty or twenty five percent of
Speaker 4: a recession, at which point the FED might you know, respond,
Speaker 4: then that's embedded in that. So when the you know,
Speaker 4: the the SEP forecast has two rate cuts, let's say,
Speaker 4: and the market has three, I'm not sure I view
Speaker 4: that as a difference. I just think one's got one
Speaker 4: a modal and one's a weighted average, and I think
Speaker 4: those aren't the same things, just in defensive economic forecasters.
Speaker 2: But if we look, you know, look at twenty three,
Speaker 2: twenty four to twenty.
Speaker 3: Five, sometimes they're different.
Speaker 4: Sometimes they're different, and wildly I was gonna say, in
Speaker 4: terms of your other question, what would I want to see?
Speaker 4: You'd want to see inflation sustainably under control, or you'd
Speaker 4: want to see you know, the economy, you know, tipping
Speaker 4: to a level that that amount of downturn would have
Speaker 4: an impact on inflation and bring it into control. And
Speaker 4: so you can get inflation on of control through rates,
Speaker 4: and you can get it through economic you prefer to
Speaker 4: do it through rates.
Speaker 3: But we'll see.
Speaker 2: And I only have you for another two minutes, so
Speaker 2: let me throw you a curveball question. Okay, I was
Speaker 2: just out in La Joya on Tory Pines. I know
Speaker 2: you're an avid golfer in your Federal reserve district. What
Speaker 2: are some of your favorite courses? I used to be
Speaker 2: on the USGA board. I'm assuming you still play. Where
Speaker 2: do you like to play in? What's your home?
Speaker 4: Of course, i'd play Kidlock and Richmond and We have
Speaker 4: a place in Paully's Island where I play the w Club,
Speaker 4: which is a Pete Die course down there. And thank
Speaker 4: you for mentioning you know golf golf is a lot
Speaker 4: like monetary policy, and that I wish I were better
Speaker 4: at both of them.
Speaker 2: Well, that's the perfect quote on which to end this.
Speaker 2: Thank you, Tom for being so generous with your time.
Speaker 2: We have been speaking with Tom Barkin. He is President
Speaker 2: and CEO of the Richmond Federal Reserve Bank, as well
Speaker 2: as a member of the Federal Open Market Committee that
Speaker 2: helps set federal reserve rates. If you enjoy this conversation, well,
Speaker 2: be sure and check out any of the five hundred
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Speaker 2: thank the crack team that helps me put these conversations together.
Speaker 2: My audio engineer is Steve Gonzalez. Anna Luke is my producer.
Speaker 2: Sean Russo is my researcher. Sage Bauman is the head
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Speaker 2: new book How Not to Invest The ideas numbers and
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