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Speaker 1: We'd like to thank everybody who is watching us on

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Speaker 1: Bloomberg Television and listening to us around the world on

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Speaker 1: Bloomberg Radio for joining us today, and thank Tom Barkin

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Speaker 1: for joining us today. Most people don't realize, probably that Washington,

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Speaker 1: DC is in the Richmond district.

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Speaker 2: So you're in charge.

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Speaker 1: If your constituents shut down the government this weekend, Is

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Speaker 1: it a big deal for the economy?

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Speaker 3: Well, pretty far from in charge, as you will know.

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Speaker 4: Well, so, look, we have a lot of workers who

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Speaker 4: are employed by the government, and of course there are

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Speaker 4: a lot of citizens who they serve, and this just

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Speaker 4: creates uncertainty, and so I don't have any insight into

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Speaker 4: how long this will last or what will actually happen.

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Speaker 4: But as it plays out, there absolutely our implications.

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Speaker 1: Well, if it goes on for a long time, it

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Speaker 1: is possible you won't have any of the government's economic data.

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Speaker 1: You can go into the November first meeting without say,

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Speaker 1: jobs or CPI data.

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Speaker 2: How does that affect what you do?

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Speaker 4: Well, of course we economists want to think first and

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Speaker 4: foremost about our so that's really good. But it would

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Speaker 4: be hard to figure out what's actually happening in the

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Speaker 4: economy without the jobs data, which is the best information

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Speaker 4: in the labor market. It's hard to know what's happening

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Speaker 4: in the economy without the inflation data, the PCEE inflation data,

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Speaker 4: which comes to the Department of Commerce. But we'll do

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Speaker 4: our best. You take the environment as it is, and

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Speaker 4: you do your best to figure out what's going on.

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Speaker 4: In my world, I just live every week on the

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Speaker 4: ground and I'm trying to talk to businesses and workers

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Speaker 4: about what's happening in the economy.

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Speaker 3: And I'll just double down on that.

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Speaker 1: Have you asked the Richmond staff to come up with

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Speaker 1: any different kind of indicators for you?

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Speaker 4: Well, starting with COVID, we introduced collectively and have been

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Speaker 4: tracking a whole different set of indicators. So I look

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Speaker 4: at credit card spend, for example, as a good indicator

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Speaker 4: of what's happening in consumer spending, and you can get

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Speaker 4: that information, or we can get that information even even

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Speaker 4: weekly are There are a lot of alternative job opening

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Speaker 4: databases people who scrape online that we work with. So

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Speaker 4: I think we're in a lot better shape now than

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Speaker 4: we might have been four or five years ago, just

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Speaker 4: because the uncertainty of COVID gave us a much more

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Speaker 4: significant focus on real time indicators.

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Speaker 2: Well, let me pick up on something you said.

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Speaker 3: There.

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Speaker 1: You get pretty much real time data on how consumers

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Speaker 1: are doing. How are consumers doing. There's a theory out

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Speaker 1: there that they're starting to pull back.

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Speaker 4: Well, the data on consumer spending, if you look at

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Speaker 4: the last two or three months, has been extraordinary and frankly,

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Speaker 4: I think a little bit stronger than I see it,

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Speaker 4: at least from the data I'm looking at. For me,

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Speaker 4: it looks like it's okay, it's solid, it's not extraordinary,

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Speaker 4: and we'll see if the revisions prove right. We'll get

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Speaker 4: more data tomorrow obviously on that, but I think it's solid.

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Speaker 4: Now you've got to segment it. So the higher end

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Speaker 4: consumer still has money, still has wealth, Equity values have

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Speaker 4: been up, house prices are up, and they're still spending,

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Speaker 4: especially on things like experiences and international travel. The lower

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Speaker 4: end consumer clearly is having to reprioritize spend. And then

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Speaker 4: I've heard some interesting indicators lately that the middle income

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Speaker 4: consumer is starting to reprioritize as well, And that would

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Speaker 4: all make sense in the context of eroding stimulus, higher rates,

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Speaker 4: and like, what.

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Speaker 1: Do you think that means for the fourth quarter, third quarter,

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Speaker 1: all the measures the now casts basically see very strong

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Speaker 1: growth anywhere from three to five percent.

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Speaker 2: Do we fall off a cliff in the fourth quarter?

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Speaker 1: Is a recession a possibility?

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Speaker 4: Well, if you define a cliff as three and a

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Speaker 4: half percent or whatever the third quarter forecasts are, I

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Speaker 4: don't see that kind of growth rate continuing, and so

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Speaker 4: you have to always worry about your baseline.

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Speaker 3: There. Growth still seems solid.

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Speaker 4: You know, we're only two days away from the fourth quarter,

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Speaker 4: and as I said, I still hear a pretty solid

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Speaker 4: business climate. But I'm anticipating the next quarter two to

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Speaker 4: be solid, not to be robust. And that's how I

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Speaker 4: see it.

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Speaker 1: Are you still in the camp that thinks well, I

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Speaker 1: guess you probably are, because there's nobody in the summary

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Speaker 1: of economic projections who said that there was going to

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Speaker 1: be a contraction. You don't see that coming for the economy.

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Speaker 4: I don't think the kind of growth we saw in

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Speaker 4: the second third quarter feels likely to continue.

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Speaker 3: I think it's going to come off of that.

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Speaker 4: How much far off of that we'll see, And that's

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Speaker 4: of course, you know, we have the luxury of time,

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Speaker 4: I guess to figure out what does happen. We've also

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Speaker 4: got these uncertainties. You talked about a government shut down,

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Speaker 4: auto strike, oil prices and the like. There's a lot

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Speaker 4: of things out there that could have an impact on

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Speaker 4: the economy. So you know, I think I'm going to

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Speaker 4: learn a lot from the next several weeks and several months.

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Speaker 3: Well.

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Speaker 1: I raised a question of the FED left in the

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Speaker 1: dot plot one more rate move for this year. Is

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Speaker 1: that a placeholder in case of emergency or do you

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Speaker 1: really think we need another another rate move to bring

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Speaker 1: down inflation?

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Speaker 4: Too early for me to know. I think they're a

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Speaker 4: wide range of possible outcomes. You could argue for a

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Speaker 4: resurgence based on the numbers we've been seeing. You could

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Speaker 4: argue for a downturn as you've been talking about, and

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Speaker 4: you could argue for a return to the pre COVID economy.

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Speaker 4: I think all of those are in sight, and you

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Speaker 4: have very different medium term rate pass against those outcomes.

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Speaker 4: So that's why I like the chance to take some

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Speaker 4: time and see what we see particularly on demand, both

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Speaker 4: core demand and labor demand, and then what we're seeing

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Speaker 4: on inflation and different scenarios for those things. I think

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Speaker 4: end up with different scenarios for rates.

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Speaker 1: I assume this means you're in the top line. There's

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Speaker 1: only two lines for twenty twenty three with one more

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Speaker 1: move or stay there. I presume you're in the top line,

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Speaker 1: that one more move could be necessary.

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Speaker 4: I'm in the camp of saying, let's see how the

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Speaker 4: economy rolls out, and we'll respond appropriately.

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Speaker 1: What is your baseline forecast for the rest of the year,

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Speaker 1: leaving these other possibilities out. I mean, you obviously can't

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Speaker 1: know what's going to happen with the auto strike, et cetera.

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Speaker 2: But let me.

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Speaker 1: Expand it into the first quarter. Where do you see

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Speaker 1: the economy going.

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Speaker 3: Well. I do think we're going to see demands soften.

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Speaker 4: I just think that the combination of credit tightening and

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Speaker 4: the rate impact the lag defective rate increases has got

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Speaker 4: to have some impact.

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Speaker 3: So I've got demand softening.

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Speaker 4: I don't think that's going to have the kind of

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Speaker 4: trauma on the labor market it may historically have had,

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Speaker 4: because people are still very loath to fire workers that

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Speaker 4: they spent a year, year and a half trying to acquire.

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Speaker 4: And so I think in addition, businesses have been investing.

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Speaker 4: It's been now sixteen seventeen months where the leading indicators.

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Speaker 3: Have predicted a recession hasn't happened yet.

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Speaker 4: But businesses in their twenty three planning and now businesses

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Speaker 4: in their twenty four planning are being cautious, and so

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Speaker 4: the combination that means there's just not as big a

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Speaker 4: cliff as you might expect, even worth the economy to slow.

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Speaker 1: But what are they telling you about employment going forward?

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Speaker 1: Because you've raised rates eleven times more than five hundred

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Speaker 1: basis points and the unemployment rate basically hasn't moved. Are

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Speaker 1: they hoarding workers at this point because it's hard to

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Speaker 1: find them. Are they prepared to start laying people off,

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Speaker 1: or do they think they can power through.

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Speaker 4: You've got two segments on the labor side. I'll call

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Speaker 4: it the professionals and the non professionals. The non professionals

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Speaker 4: are really the part that we're short during COVID, and

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Speaker 4: you'll notice if you look at these layoff announcements over

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Speaker 4: the last six or nine months, they're almost all professionals,

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Speaker 4: support and overhead type of people. The skilled trades, the

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Speaker 4: frontline workers for the most part, aren't being affected, and

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Speaker 4: that's because people are really worried you'll be able to

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Speaker 4: find replacements should the economy come back. On the professional side, well,

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Speaker 4: there have been dislocations. That's a group that repots relatively quickly,

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Speaker 4: and so you're not seeing it in the unemployment rate

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Speaker 4: because they typically run unemployment at about two percent, and

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Speaker 4: so it's just a very much lower unemployment group. They

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Speaker 4: can find other things to do, and so the dynamics

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Speaker 4: of the unemployment rate are actually just different than the

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Speaker 4: kind of downturn that we're used to, like the one

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Speaker 4: in eight, which hit the people last in the workforce

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Speaker 4: and the manufacturer and the construction workers the hardest.

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Speaker 1: Well, do you still think that unemployment has to rise

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Speaker 1: in order to bring inflation down? Jay Paul promised pain,

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Speaker 1: but so far you're disappointing the masochists.

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Speaker 3: You're saying he's under delivering on pain. Now.

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Speaker 4: I think what has to happen is it's very hard

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Speaker 4: to imagine inflation settling while the economy is growing significantly

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Speaker 4: faster than trend. That just is a strange thing to believe.

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Speaker 4: You'd have to believe it's all supply, And I think

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Speaker 4: while supply has been a big part of this, it's

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Speaker 4: not all of it. We've unleashed Unfortunately, people's ability to

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Speaker 4: use price as a lever, and they will use.

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Speaker 3: It until it comes down. So I think thought to

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Speaker 3: be some softening.

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Speaker 4: But as I said, I don't think that softening is

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Speaker 4: likely to hit the labor market in the kind of

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Speaker 4: way that we're used to seeing because of this issue

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Speaker 4: of people retaining workers and because of the issue with

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Speaker 4: people have already been cautious with their hiring.

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Speaker 2: What are business leaders telling you about wages?

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Speaker 1: Are they able now to bring down the increases and

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Speaker 1: get them to a more sustainable level.

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Speaker 4: So if you think of merit pay, and most everyone

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Speaker 4: I talked to is thinking about the end of the

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Speaker 4: year merrit pool, maybe it was two or three percent normally,

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Speaker 4: maybe last year it had to be five or six percent.

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Speaker 4: Because of inflation. People clearly are seeing that coming down.

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Speaker 4: Maybe half the people I'm talking to would say it'll

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Speaker 4: be like it used to be. The other half would say,

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Speaker 4: maybe it'll be three to four, not two to three.

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Speaker 4: And so I think bringing down price inflation overall has

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Speaker 4: brought down those kind of expectations. The place where you're

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Speaker 4: still seeing wage pressure is skilled trades and construction workers.

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Speaker 3: Even I've heard people who.

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Speaker 4: Assistance in veterinary, So as you know places where you

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Speaker 4: need a degree, where demand has shifted up nurses and

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Speaker 4: we just haven't had the supply. That's still a place

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Speaker 4: that's got meaningful wage pressure.

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Speaker 2: I have to ask you about the bond market.

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Speaker 1: You heard the anchors talking about the markets before we

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Speaker 1: came on here. We've seen yields rising two levels that

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Speaker 1: we haven't seen basically since the Great Financial Crisis started?

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Speaker 1: Does that worry you? Does that encourage you? How do

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Speaker 1: you feel? How do you look at the bond marketing?

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Speaker 4: I don't know how people look at the bond market

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Speaker 4: every day and keep happy or unhappy. It seems like

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Speaker 4: it moves, so don't I try not to spend too

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Speaker 4: much time focused on it. What I will say is

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Speaker 4: that financial conditions are the way that monetary policy work

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Speaker 4: their way through the economy. Financial conditions, at least the

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Speaker 4: part which were bond rates and equity values, actually loosened

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Speaker 4: over the summer and they're tightening back up again. And

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Speaker 4: so I take it as one of many indicators that

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Speaker 4: financial conditions are tightening. And then I'm looking to see

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Speaker 4: whether that tightening has the kind of impact on demand

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Speaker 4: and eventually inflation that we would want.

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Speaker 2: Is that one reason that you took some of the

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Speaker 2: cuts for next year out.

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Speaker 4: Well, everybody did their own version of the SEP, and

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Speaker 4: as you well know, it's a median, so it's ninety

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Speaker 4: one person's thing.

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Speaker 3: But I think as I looked.

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Speaker 4: At the SEP, what I saw was stronger growth forecasts.

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Speaker 4: I saw lower unemployment forecasts, and I saw inflation the same.

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Speaker 4: And the only way those three things squares with the

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Speaker 4: fourth thing with is less accommodative monetary possy.

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Speaker 3: One more question.

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Speaker 1: Tomorrow we get the PCE numbers for August, and there

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Speaker 1: is the people who do the math on these things.

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Speaker 1: So if it comes in as forecast a point three

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Speaker 1: or point two in a month over month, bass it

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Speaker 1: sets you up to come in below your brand new

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Speaker 1: forecast for PCE.

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Speaker 2: Do you think that maybe.

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Speaker 1: You're doing better than you give the impression in terms

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Speaker 1: of bringing down inflation.

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Speaker 4: Well, the last five months of inflation and they've been restated,

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Speaker 4: as you know, I've been encouraging.

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Speaker 3: If you look at the last five cores, they've.

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Speaker 4: Been point three point three point three and then point

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Speaker 4: two point two.

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Speaker 3: And there are a lot of people who estimate another.

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Speaker 4: Point two tomorrow, and of course on a six month

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Speaker 4: basis that means you're at three percent, and I think

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Speaker 4: on a twelve month basis it would be three and

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Speaker 4: a half or something like that, so that's encouraging it.

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Speaker 4: Nobody in my shop is rooting against lower inflation, so

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Speaker 4: we'd be happy with that.

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Speaker 3: We'll see what happens, all right.

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Speaker 1: Tom Barkin, thank you very much for coming in today.

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Speaker 1: The president of the Richmond Federal Reserve Bank,