Richmond Fed President Tom Barkin On Getting Inflation Under Control

0:00You're being sold an AI future where you're obsolete or irrelevant. That vision is wrong. At Palantir, they're building AI that helps workers and unlocks their full potential. American workers are our nation's greatest strength. AI shouldn't eliminate them. It should elevate them. Palantir is here to tell their stories. From factories to hospitals, AI is freeing people from drudgery, letting them do what humans do best. Create. Solve. Build. Palantir, making Americans irreplaceable.

1:01at odoo.com. That's odoo.com.

1:08Bloomberg Audio Studios. Podcasts. Radio. News.

1:25Hello and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. So Joe, we have a treat for OddLots listeners. That's right. We have a special episode of the podcast with Richmond Fed President Tom Barkin. So we were actually on a reporting trip shadowing Tom as he goes through some of his district and speaks to local business leaders there. We learned a lot. We spent a lot of time with him. You'll hear more from that trip in an upcoming OddLots episode. But in the meantime, we also talked to him about some more macro trends, things that are happening right now that he's seeing in the economy.

2:05And we're going to share that portion of the interview with you right now. So, so far in 2024, we've seen three hotter than generally the inflation data has been hotter than expected. And some of the there's certainly been some cold water on some of the soft landing optimism. What do you attribute that to? Do you think this is a new trend or is it a speed bump in the road, as they say? Well, so I think there are two interesting things going on with the data. One is demand has been pretty robust against most expectations that it would slow down. We got retail sales this week very strong. We've got three strong job reports this year.

2:45And so the economy in general still seems to be very healthy. And I think a lot of people wondered whether we weren't at the end of a growth period. Still seems to be strong. At the same time, inflation has remained stubbornly above 3 % on a monthly annualized rate. And there are lots of ways to interpret it. I am from the school that no one's as good as they are on their best day or as bad as they are on their worst. The seven months before the end of the year, we ran at 1.9 % headline inflation. The last three months have been somewhat higher. If you took the 10-month the number. It's not that bad, actually.

3:24And so I think the overall story that inflation's moderating is still the right story. But I've been of the view that inflation will be more stubborn to come back to 2 % than we would like. And in particular, in the last half of last year, part of the reason the numbers came back so nicely was that goods turned deflationary, and that offset still higher than normal levels of inflation on services and shelter. We're not trying to pick a particular mix of inflation, but it did make me worry that if goods price reductions ceased, you'd still be left with higher than normal services and shelter. And that's what's happened in the first quarter of the year.

4:06Is there still room for goods to reduce? Of course. Is there still a story of why shelter might come down with new rents coming down? Of course. And with wages normalizing services? Absolutely. But it hasn't happened yet. On this note, the last time we spoke to you on the podcast, you talked about the need to maybe offset housing strength in a different area. So if housing has proved to be surprisingly resilient, maybe you need to see an offset somewhere else in the economy. Is that still your thinking? Well, I'm open to housing coming down. And there are folks who've done models that suggest that with new rents coming down the way they have, we're just minutes away from shelter inflation coming down as well.

4:48And that would be great. If it doesn't come down and you want to get to 2%, then either goods or services or both need to run at less than their historic levels of inflation. That's just simple math. And if it doesn't come down, that's what you'd be looking for, is some sense that relative prices have changed in a way. And I want to make this point that that's entirely conceivable. Relative prices change all the time. In the 2000s, we had healthcare inflation that was quite significant and much more than it was in the 90s. But goods price deflation came down. So the basket does shift and it's fine if it shifts, just needs to get to 2 % overall.

5:25There's sort of whispers out there and some people talk about it and you can kind of see it in the rates, options markets and stuff. But there is this talk like, what if the hiking cycle isn't actually over? What if the next rate move is not a cut, as has been the presumption for a while? What do you think it would have to take, or what would you have to see in the data to say, no, this isn't just a matter of waiting for the improvement to occur. There is a reason to do more work. It would have to be around inflation re-accelerating and having conviction that You need to do more. And when like, I mean, okay, so we've had this little three month pickup from the previous seven months.

6:04What is like, okay, this is actually inflation reaccelerating rather than just. A durable trend versus a blip. Yeah. What does that look like? Exactly. What is the, what is the. Okay. Well put. Thank you. No, I'm going to say what is the durable, what constitutes a durable trend? I mean, a trend that is durable. I think it's really hard to get into hypotheticals here. You know, what I'll say is we're in a situation today where demand is robust, but I see no signs yet that it's overheating. And overheating would lead to pressure on wages, would lead to pressure on prices, such that things were escalating.

6:43And you can't find that in the wage numbers or even in the three-month price numbers. And you can't find that. So, you know, demand is robust but not overheating. And inflation has come down and is still coming down on a 12-month basis, but is stubbornly, at least over the last three months, plateaued above our target. And so I think that makes policy pretty straightforward with today's world, which is you have restrictive rates and you want to be restrictive and bring inflation down. You could come up with scenarios where the two parts of our mandate are in different balance. But right now, I think you've got healthy but not overheated demand and you've got inflation that remains stubbornly high.

7:20So I think to me, the policy path is pretty straightforward. I think you anticipated my next question, but you say rates are restrictive. How are you judging the restrictiveness of monetary policy? Because when I look at something like the Financial Conditions Index, up until the past week or so, or even few days, it was pretty loose. And so there seems to be a disconnect between a certain number of Fed officials who will say policy is restrictive versus looking at something like that financial conditions index, or even the amount of refinancing being undertaken by the corporate bond market or the loan market recently.

7:57Right. So there are many financial conditions indices. Some of them show looser than others. The ones that seem to show the loosest are the ones that put the most weight on the equity markets, obviously. We were with our carport manufacturer today. He would certainly say financial conditions are tight. And it's very clear to me as I talk around the economy that there are significant sectors where financial conditions are tight. And they do tend to be those sectors, like this guy who's most vulnerable to construction and to home, right? And people spending around their home. And in his case, RV garage covers are a big part of what he does.

8:33And of course, RVs went crazy, but people aren't buying RVs at the same pace anymore. So I do see interest rates going to the economy and I see that as right. But I also think it's fair to say the level of restrictiveness is something you take at some faith. I do like to look at real tip yields to give me some sense, but you are comparing it to a hypothetical, not a hypothetical, a estimated R star that is hard to know where you really are. And there are lots of estimates, including one from the Richmond Fed, that are higher than most people's standard R star. So you have to be open to the notion that the level of restrictiveness is less than you think.

9:09And you would learn that through the economy. You learn that through demand accelerating more than you'd think it would. And that's something you have to be attentive to. I haven't yet concluded that. The overheating would be, that would be part of your case for doing more would be overheating. So you don't think it's yours restrictive as you thought you were, which meant you have to do a little more. I just have one more question. But when it comes to housing, obviously, it's a big driver of the upward pressure on inflation. through various measures. It's also sort of this major societal problem that people are frustrated with almost across the country.

9:43When you're thinking about rate policy, how much do you think about not just, okay, what's going to happen in the next three months or whatever, but how much does restrictive policy today restrain the housing supply of tomorrow? Whether it's like a multifamily, we got recent numbers that new multifamily development has really fallen off quite a bit. And in theory, that means housing, more scarcity in 2026 or whatever. Do you fold that into your thinking in terms of policy today? You try to think it through as best you can. Don't forget that the impact of higher rates on housing demand is pretty immediate.

10:22And the impact of higher rates on housing supply, because it gets delivered two years later, is more further out. And when we started raising rates, we were in the middle of as frothy a period in the housing market as I remember. 12 bids per house, houses going for $40 ,000 over list. And so low rates wasn't the answer to that particular supply and demand issue. I think the theory of the case is that you raise rates, it brings down demand to levels more in balance with supply. And while it may have an impact with supply, you get inflation under control and then you can lower rates again so that supply can blossom.

10:58I think that's the theory of the case. I'll point out that in this, I mean, you mentioned multifamily, but single family starts are quite strong and much stronger than normal in this cycle, in part because I think availability of existing homes has been so low. And multifamily starts have come down a bunch, but that was from a very, very high peak. And so they're not that far off today where they were before the pandemic. And so stuff's still getting built. There is a future potential challenge in supply, But I think the hope is that demand comes off enough that we can bring that market into better balance.

11:56they're witnessing something different and revolutionary. From re-industrializing the nation's defense base to shipyard workers building faster and frontline workers boosting productivity, AI is transforming work across the nation. AI is not replacing American workers or flattening them into conformity. It's unleashing what makes each one irreplaceable, their judgment, their craft, their creativity. When American workers become more powerfully themselves, They own the future. Palantir, making Americans irreplaceable. Running a business is hard enough. So why make it harder with a dozen different apps that don't talk to each other?

12:36One for sales, another for inventory, a separate one for accounting. Before you know it, you are drowning in software instead of growing your business. This is where Odoo comes in. Odoo is the only business software you'll ever need. It's an all-in-one, fully integrated platform that handles everything. crm accounting inventory e-commerce hr and more no more app overload no more juggling logins just one seamless system that makes work easier and the best part odoo replaces multiple expensive platforms for a fraction of the cost it's built to grow with your business whether you are just starting out or already scaling up plus it's easy to use customizable and designed to streamline every process so you can focus on what really matters, running your business.

13:22Thousands of businesses have made the switch, so why not you? Try Odoo for free at odoo.com. That's O-D-O-O dot com. Just going back to the inflation outlook, I think at this point there have been a number of Fed officials who seem to have suggested that the worst outcome of the current monetary policy cycle or one of the worst outcomes would be if they decided to start easing only to see inflation pick back up again. And I guess my question is, why? Why is that so bad? Because couldn't you just alter course? Couldn't you start tightening again if you saw that in the data? Well, I think it's hard to do my job and not be aware of the 70s.

14:07And I remember the 70s. It wasn't pretty. I also had bad hair in that era. But what happened in the 70s, this is the fundamental object lesson of monetary policy is every time there was the slightest hint that the economy could be turning down, they lowered rates and then inflation came back up and then they increased rates. And the issue is when the Fed doesn't look like it's resolute on inflation, inflation doesn't come back to where it was before it comes to higher than it was before, which means that every time to fight it, you've got to take rates even higher, which means that the damage you do to the economy is even more.

14:43And so letting expectations spiral out of control, I think is just a very risky thing for the economy. And that's not some theoretical model. We actually lived it in the 70s. And much like me, the 70s weren't pretty. Just because you mentioned R-star and the neutral rate, and I get the sense, and this is just based off of a Bank for International Settlements paper that came out a couple weeks ago, but they basically suggested that maybe R-star, R-star's time in the spotlight has kind of come and gone. And the idea is that, well, we should be focused more on what the actual inflation data is telling us rather than some hypothetical unknown neutral rate that we're having to estimate and triangulate from a variety of factors.

15:27Does R-star still loom large in the Fed's thinking, or do you think it's been sort of superseded by what we've seen in the real economy? Well, I think we certainly spend a lot of time trying to understand and think about our star and where it's headed. Not because I believe that there's one precise point estimate. The standard deviations around most estimates are quite wide. But because I think you do have to ask yourself the question, are you restrictive or restrictive enough for what you're trying to do to inflation? So you ask yourself that question. And if the economy comes in more robust and inflation comes in more robust, then you ask yourself the question whether your prior assumption was right or not.

16:06And if it comes in south of where you thought, which is what happened for most of the 2010s, then you ask yourself the question of whether your estimate of R-star was too high. And so most estimates in the 2010s came down significantly. Some of that was done by models. Some of that was done by just observation of an economy that didn't seem very robust despite extremely low rates. If our economy continues to be as robust as it is with rates where they are, I think that'll tell you something. If it's changed, why? There are a lot of people who are better at those models than I am. I think productivity would be a very simple way to explain the change.

16:42A higher productivity economy is a higher trend growth economy, which would do it. You might argue fiscal has something to do with it. And certainly we're at a different level of fiscal spend today than we were in the early 2010s. But again, I'm not going to profess to be the expert on that. Can I ask a question? Why is it 2 %? Is it because of the expectations part is more important than the actual number that you're trying to set something to aim for? So there was a debate, you know, why 2 %? There was a debate in the 90s, actually, and the Richmond Fed was right in the middle of it, Al Broadus, about what the right target should be.

17:17Interestingly, at the time, the choice was between zero and two, right? Because our mandate is stable prices. And there were those who thought stable means stable. Stable zero is stable. It was widely debated all the way until it was announced in 2012. But nowhere in that debate can you find evidence that people were debating three, four, or five. They were debating one or one and a half or two or zero. Why pick two? Well, a few things that are relevant. Pretty much every central bank in the world has two, plus or minus. Some have up to two or one and a half to two and a half. Second is it seems to have worked for 30 years.

17:50I mean, we actually delivered it. So it's not some random number you could never get to. Third, there is mismeasurement in there. And the mismeasurement is actually thought by most people to say that actual inflation is a little bit less than the 2 % number. A good example would be encyclopedias. I used to buy encyclopedia. No one buys an encyclopedia today. It's on your phone. and so it's out of the index. And so it's gone from being whatever world book was,$399 to zero. That's deflation, but it's out of the index. And so technology actually, you're not buying a camera anymore or film, it's taking the set of things out of the index that deflationary.

18:29But maybe the best reason is it's really hard to hit your target exactly. If you set a target at zero and you don't hit exactly, you're in deflationary territory. And deflation is where everything tomorrow costs less than it does today. So the incentive to buy today goes down, which means an economy tends to stagnate. And that's Japan and what it's been through. So two gives you a little bit of room against zero means we can do a little bit to cut rates when we need to. That's the theory of it. And you said since it's work, there's no need to change it. Yeah. And in particular, you'd never change it before you hit it.

19:02And so we're out there trying to hit a target. If inflation is at three and you decide, oh, new target's three, I just don't think that works for your credibility. And that's really the major tool the Fed has is credibility. All right. Tom Barkin. Thank you so much. That was fantastic. No, I love you guys. Great to be with you. Thank you so much. Thank you. Keep that in, Dash. That was our conversation with Tom Barkin. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at CarmenArmin, Dashiell Bennett at Dashbot and Kale Brooks at Kale Brooks.

19:40And thank you to our producer, Moses Ondon. For more OddLots content, go to Bloomberg.com slash OddLots, where we have transcripts, a blog and a newsletter that comes out every Friday. And you can chat with fellow listeners in the Discord 24-7, Discord.gg slash OddLots. And if you enjoy OddLots, if you like it when we speak to Fed presidents, then please leave us a positive review on your favorite podcast platform. Thanks for listening.

20:11Thank you.

20:36mint mobile you know one of the perks about having four kids that you know about is actually getting a direct line to the big man up north and this year he wants you to know the best gift that you can give someone is the gift of mint mobile's unlimited wireless for 15 a month now you don't even need to wrap it give it a try at mintmobile.com slash switch up front payment of 45 for three month plan equivalent to 15 per month required new customer offer for first three months only speed slow after 35 gigabytes if network's busy taxes and fees extra see mintmobile.com Amazon Five Star Theater presents Real Customer Reviews performed by Ed Helms.

21:12Tonight's review, Tactical Jacket. I was living a simple life. Didn't get out much. Then I bought this jacket and everything changed. Women came flocking to me from lands domestic and foreign. On the 245-day sailboat voyage home, I was attacked by a shark. I knew it was the jacket he was after. Giving up the jacket in exchange for my life. Five stars, Amazon customer 69. Shop the perfect gift this holiday on Amazon.