Richmond Fed’s Tom Barkin on the Surprisingly Resilient Real Economy

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2:15Hello and welcome to another episode of the Odd Thoughts Podcast. I'm Tracy Alloway.

2:19Tracy Alloway:And I'm Joe Weisenthal. Joe, we're still in Jackson Hole. That's right. Plenty to talk about. Plenty. We just got the speech from Fed Chair Kevin Warsh. That's right. which I think most people would describe as hawk-ish, although maybe there's kind of a gap in between the hawk and the ish part. And there's still plenty of questions about the direction of the US economy and monetary policy in general. So we should talk a little bit more about it. We should. And beyond that, there's many theoretical questions out there. What is the neutral rate of interest? What is the role of AI on productivity?

2:51Tracy Alloway:And all of that is very interesting. Where's the term premium at? But also, it'd be interesting to know what the central bankers are hearing about actual businesses right now. And like, what's going on on the ground? On the ground color. Okay. And there is one man that we go to for on the ground color. We have the perfect guest, of course. We're going to be speaking with Richmond Fed President Tom Barkin. So Tom, thank you so much for coming back on Odd Lots. Great to be back with you. I think it's my third year in a row here in Jackson Hole. Oh, we appreciate it. Yeah, no. And they let you outside of the hotel room.

3:19We get the Tetons in the back. So this is great. The production values have gone up, I will say. Okay, so let's just start very simply. Warsh's speech, what'd you think? I mean, he does a great job. He's a great speaker. And I thought it was a very authentic speech. I mean, Kevin laid out, I think, how he sees the world. He laid out how he sees the economy. The folks I've talked to appreciated the clarity in the thing. And I personally thought he had a very accurate sense of the economy. So I was very much aligned with what he said. And I thought he said it well.

3:47Tracy Alloway:So he said, okay, inflation seems to be going in the wrong direction right now. He described policy as not restrictive. So then you fill in the blanks and it's like, okay, that means rate hikes. But he didn't quite say that. Just for you, as you see things, A, do you agree about inflation and the stance of policy? But then more importantly, then what do we do about it? Yeah. So the economy's solid. I think he said that. And you can definitely see that. And the GDP numbers and the consumer spending numbers. I mean, it's been crazy this year that gas prices went up and consumer spending accelerated.

4:20It's been crazy that you have all this uncertainty and artificial intelligence spending has led business investment to almost double versus this historic thing. So there's a lot of momentum in the economy. Jobs market seems to have stabilized, unemployment rates low. So all that's good. And I'm not saying inflation is definitely heading in the wrong direction. It's just not in the right place. And that's how I think it's not in the right place. I also would say the job market's good, but it's not frothy. I mean, this low fire thing continues. And so that's where we are. The policy thing we'll figure out.

4:51I've had the number one thing people have asked me after his speech is, well, I guess that makes you, you know, September. That tells you something for September. And I said, well, I listened to his speech, and I'm pretty sure he doesn't like forward guidance. So I don't think you should take any forward guidance from a speech from a guy who doesn't give forward guidance. I think it's probably a good way to think about it. We can't help ourselves is the problem. No, I know. But I mean, I think you can talk about the economy in a very good way, and then you can talk about forward guidance. If you choose not to do forward guidance, you don't do forward guidance.

5:16I want to talk more about forward guidance, but since you mentioned the resilience of the economy, do you have a working theory for what's going on here? Because I think, to your point earlier, it surprised a lot of people that even with prices still pretty high, gas going up, all the economic uncertainty, consumers keep spending. They do keep spending. And I would compare it to coming out of the Great Recession, where out of the Great Recession, you had people who lost their jobs, lost their house, lost their car, savings destroyed, need to rebuild for retirement. We had five, six, seven years, the secular stagnation where people weren't spending the way you thought they would.

5:53I compare it to COVID. We thought for two months it was going to be terrible. But then coming out of it, people had money in their pockets. You had stimulus. You had money you hadn't spent. You had equity values up. You had home values up. And I think you had a mindset that just says, I'm bound and determined to spend. And so we all know the wealthy people are spending because they have more wealth. But even those with less wealth, what I hear is a very creative consumer figuring out ways to find money, to spend money, to borrow from the future. You can see the finding money in the growth of private label, the move to Walmart and dollar stores, if you look at their results.

6:29But people aren't carrying insurance. There's a story in the journal a couple weeks ago about more people living from home. You know, you and I think more people living from home, oh, my God, my kids are coming back. I think, wait a second, those are people not paying rent, and they're using that money to spend on something else. And I've talked to auto lenders who talk about people being 60 days delinquent, not 120 days delinquent, because they need to find the money, but they don't want to lose their car. I've talked to gas providers who say people aren't paying the gas bill during the summer because no one's going to have a problem with gas in the summer.

7:01It's the winter that matters. So people are finding ways to effectively borrow from the future, savings rates down. And I think that's what's keeping the spending going. And underneath it all is this just positive energy to keep spending. And I really do think as long as the markets are healthy and people have jobs, they're going to keep finding a way to spend.

7:20Tracy Alloway:That was a very good sort of summary of one of the engines of the economy that's clearly continuing to fire. We traveled with you. Was that 2023 or 2024 that we were in Mount Airy? 24, I think. 2024. And at that point, one of the things, we were talking about rural housing issues, rural childcare issues, but also in one of the themes that came up was the scarcity of skilled trades. Yeah. And now I have to imagine it's much worse because if you're a skilled electrician, you probably are working, at least in theory, the AI boom, et cetera. We talked to Austin Goolsbee yesterday, or I lost time. We talked to Austin Goolsbee maybe two days ago.

7:58Tracy Alloway:And he's like, yes, we hear a lot of people complaining about the scarcity of skilled trades and the AI build out. People are always complaining. He wasn't sure how much is actually related to data center and AI construction. What's your read on the scarcity of parts, materials and labor for general things and the degree to which AI investment is crowding out and making life more difficult for other types of industry? Yeah, so it's been a monumental construction investment cycle. So$700 billion announced in one week, I think, at the beginning of February alone. And for sure, if you're trying to find switch gears or transformers or electricians, they are very hot and in very short supply.

8:39So there's no doubt in my mind that there are constraints being put on it. I think the overall construction cycle, though, it's fascinating because office buildings aren't being built. Multifamily starts are way down. You do have industrialists starting to come back. Home buildings, okay, not great. And so I do think there's been a big movement in terms of construction from one sector of the construction market into another sector of the construction market. Now, how much of that is crowding out, I think, is a good question. Because when I talk to people in, let's say, multifamily construction, they'll tell me you can't pencil it out.

9:12And they want to talk about interest rates. And, of course, I say, well, is it really interest rates? Because we had the same interest rates in 2004 and 2005, and you're building lots of buildings. And then they'll acknowledge that construction costs are up and labor costs are up and they have to put more equity into projects and all that kind of stuff. And so it's more than that. But you could argue that all this data center construction is making it more expensive to do this other construction, which means they're not doing this other construction because it's more expensive. So there's a chicken and egg question in there.

9:40Just within your district, I know you travel around and as we said, you like to talk to people on the ground and actual businesses. but what are the most notable impacts of AI that you're seeing so far, whether it's on something like the labor market, in the low hire, low fire environment, or prices? Well, so it's interesting. I mean, the number one impact is a political impact. And what I mean by that is every chamber of commerce meeting I do, every town hall I do, I'm getting questions about jobs and water and data centers and all the rest of it. It's really quite striking. And you can see when you travel the issues on people's minds by the questions they ask.

10:15In terms of the economy itself, I don't think it's having this massive productivity impact quite yet, outside of just a couple areas where there really is a structure where you can substitute an agent for call centers, programming. I mean, you see it there. There's some heavy documentation, compliance documents. But by and large, the productivity boom we're seeing, which is significant, I think has really been driven by 2022 when you had people short workers. And so they invested in automation. They invested in new staffing models and different operating processes. And they're reaping the benefits of those today.

10:49And people are enthusiastic. Owners, executives are enthusiastic about AI. Workers, somewhat less so. But it's still being very much used as an extra added, get my job done better, get my job done faster kind of thing. The one place you see it, though, is on the hiring side. because, you know, this may not be true for Bloomberg, but in everywhere else in the economy, people are saying, you know, I don't know what the future looks like. Maybe I don't need to hire as much. I wonder whether AI can do that job. And so why don't you leverage and see if you can't fill the job using AI first and then we'll hire later.

11:23That's happening, you know, at some scale. And so I do think that's the place, you know, where it's most relevant.

11:28Tracy Alloway:You know, one thing that's clearly working in, I guess, the Fed's favor when it comes to the dual mandate is the housing market is pretty, you know, it's not very hot. That's sort of, most of the numbers there are going in the right direction, so to speak, from a getting inflation back to target perspective. But how confident are you that that will persist, especially if we've had softness in construction, then eventually, do you have any anxiety that eventually then that turns into housing tightness again? Oh, I think that's highly likely. You know, at some point you won't have, you've got a whole generation of people who really want houses and the price isn't quite right for them.

12:03At some point, they'll have their second kid and they need a bigger house. And so the demand will come. And then if you don't have the housing inventory, whether it's rental or single family, then the prices will go back up. I will say we sort of got in the mode a few years ago that I think we should back off of, of trying to take the inflation data and parse it and take this part out of it and this part of it.

12:26Tracy Alloway:It's very tempting to do that, to torture it and get the answer you want. And I was getting, for a while, when rents were coming, where market rent numbers were coming down faster than the CPI rent numbers, I was getting emails from real estate developers saying, you've got your numbers wrong and the rents are coming down faster. Well, I'm not getting those emails anymore. They're not saying, hey, let's take the Apple, your Apple phone just got more expensive. No, I mean, so you don't want to over-parse it. You want to say, overall, there's about a money in the system. There's an amount of goods people are trying to buy with that money.

13:01Maybe prices of housing came down, but maybe prices of something go up. And you're looking at inflation as a total basket. That's how I like to think about it. Yeah. So Warsh was talking about this yesterday. He was talking about looking at the breadth of inflation and things like that. And I'm curious, do you still see, he was also talking about a lot of the one-off shocks that we've seen. So the Iran war and the impact on gas prices and things like that. is the overall environment just more inflationary in general when we see these one-off shocks that just seem to keep coming, right? It's like this month, it's this one thing and okay, maybe it'll fade away into the background after a while.

13:38But then the next month, there's another thing on the way. It seems like it. And I think the question is, is normal today or was normal 10 years ago? And I think normal may be a lot more like today than it was 10 years ago. If you think about the environment 10 years ago, fracking and what that did to help bring energy prices down. And demographics, which meant you had more workers and kept wage costs under control. And e-commerce, which was bringing prices down for stuff you bought online. And there was just a bunch of globalization, access, all these factors which were, I think, bringing inflation down.

14:13I don't think it's ridiculous to imagine that 10 years later, you might have a bunch of factors that would bring inflation up. Now, the inflation we realize in time depends on what we do about it. So just because, you know, I like to use the analogy of sailing. You know, you just sail differently if you've got the wind behind you than if you're sailing into the wind. You can still get there. You just have to, you know, tighten your sheet. And I think that's the kind of risk we've got if you're in a world with an ever-continuing sense of inflationary shocks. You just have to lean against that wind.

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17:41Tracy Alloway:So obviously one of the things that came up in the speech, and again, we know that Chairman Walsh is not a fan of forward guidance. There's going to be these task forces, et cetera, that may revisit some of the Fed's approaches to communications, et cetera. Would you be on board with say, you know what, we don't need dots anymore. We don't need to have press conferences like for most of Fed's history. The chair didn't have a press conference. Would you in your mind, should all of these things be on the table? Should you be talking to us right now? Yeah, yeah, seriously. So there was someone who said the theory of a great mind is being able to hold two opposable thoughts at the same time.

18:18So I hold the following two thoughts to be very clear. One is if we're relatively transparent about how we think about things, that helps build credibility with the public. It helps build trust in the institution. And it helps markets do some of the work for you. That's the famous Bernanke theory. I also 100 % agree with Chairman Warsh when he says sometimes if you give too much forward guidance, you get stuck in it. And you end up having to make a suboptimal decision because you've misguided. And I think it's fair to say that's part of the 2021, 2022 story, which is we had very strong forward guidance in place.

18:51And it was very hard to get your way out of it. So I can hold both those thoughts at the same time. And I hope to keep coming and talking to you as long as you'll have me.

18:59Tracy Alloway:What about like dots and like these specific techniques? We'll have to debate the techniques. And I'm sure we will. My view on the SEP is I really like doing the SEP. I mean, I like negotiating, arguing, debating with my team, my policy bias next to my economy bias. And it often happens that I've gotten a little out of whack. I mean, I still think the policy ought to be that, but I'm not really thinking about it in the right way. And we have those debates, and I feel it really sharpens my thinking. So regardless of whether we release it or not, I plan to keep doing an SEP because I I think having your own forecast and working against the forecast is a pretty healthy thing.

19:37Now, should we release it? The one thing I don't like about the SEP is I think the dot plot itself is a picture that overwhelms the story. And I've said this in other forums. But if what comes out is I go do a Chamber of Commerce in Greensboro and somebody says to me, well, I see the Fed promised two more rate cuts this year, then that's not good communication because that's not what we've done. We've done a set of forecasts independently. And so good communication to me has to communicate well. And if what's happening is that picture is swamping the narrative, then we're going to get to think differently about the picture.

20:13So I take the point that there's a risk with forward guidance that the Fed could get boxed into a certain decision in a suboptimal way. But that said, and I also take the point that there's a distinction between forward guidance and the reaction function in general. But all of that said, at some point, if inflation is above target, you would think the Fed needs to act. And Warsh kind of insinuated this in his speech. He talked about, well, inflation's been above target for, what was it, 65 months or something? And he said that is squarely on the Fed. When you hear something like that, I mean, you were in the room, you were at the Fed for part or all of the past 65 months.

20:50What do you think? What's your reaction? Well, I'm definitely 100 % insistent on getting inflation under control. And I think it's fair to hold that mirror against what we're doing and ask ourselves the question of whether we're doing it the right way. I think there are two ways you can look at where we are today. You can take a 65-month view, or you can take a, I'll get the months right, a 47-month view followed by an 18-month view. And if you do the second, which I'm not arguing for, I'm just saying it's a perfectly defensible way to do it, is you say inflation happened, maybe we were a little slow, we raised rates, inflation came down.