Tom Barkin on Why Central Banking Is on Hard Mode Now

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1:49Hello and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, we're still at Jackson Hole. Yes. By the time this episode comes out, the dust will have settled. That's correct. Over the entire event. And we will have gotten, well, we already had the speech from Fed Chair Jerome Powell, right? That's right. And this afternoon, as we're recording, we're seeing markets surging. That's right. Everyone, it seems, has interpreted this as pretty dovish. Yeah, that's right. Anne Wong at Bloomberg had an interesting piece. saying, oh, maybe it wasn't as dovish as people think.

2:24But it felt dovish in the context of, you know, a recent chat with Austin Goolsbee. He was concerned about he's starting to look at that inflation data a little bit more. Felt dovish in the context of our recent episode with Kansas City Fed President Jeffrey Schmid. He too was talking about how, you know, things are maybe still looking a little warm. You could be talking about hikes. If you look at the Taylor rule, you know, you could argue maybe rates should be a little higher. Anyway, I think we should continue on our survey of as many Fed presidents as we can. All right. Well, we do have the perfect guest on that note, a friend of the pod, Richmond Fed President Tom Barkin.

3:00Welcome back. It's good to see you. Yeah, good to see you guys too. Thanks so much for doing this, taking time out of your, you know, hiking and conferencing schedule. So we appreciate it. Why don't we just start with the obvious question, which is, I guess you talked earlier this week that the balance between employment risks and inflation risks is really unclear at the moment. Powell seemed to err on the side of the labor market, right? He kind of chose to prioritize that. Do you think that's the right move? Well, as you said, I've been saying I'm confused about everything. I'm confused about the labor market and the inflation side.

3:38And I think there's lots of people who come up with different views of how to weigh the risks. Here's the interesting thing. We've been hearing from businesses for a year and a half that they haven't been hiring. We've been seeing in the number that they haven't been hiring. They also haven't been laying people off. And when we get into the jobs numbers that kept coming in at 130 ,000 a month or 120 ,000 a month, that seemed strange, but it was good news. I mean, there's nothing wrong with a lot of jobs. And so what we saw last month was a different jobs report with a jobs revision that now sort of says, hey, we're growing at 35 ,000 jobs a month.

4:11That actually makes a little more intuitive sense to me, given what I'm hearing in the marketplace. If you're not hiring, then where are the new hires coming from? And by the way, we'll get a revision, a QCW in September that probably will take those numbers down again. And so if you're dealing with 130 ,000 job market, that's a very different level of confidence than if you're dealing with a 35 ,000 or even maybe even a zero job growth market. And I think that's where the concern comes from. What holds you back from being overly concerned is the unemployment rate, which still is at 4.2%, perfectly really good unemployment rate at any time in any cycle.

4:48And so how lucky do you feel? Did you feel on the jobs growth? How much do you feel on the unemployment rate? The gap between the two, obviously, is driven by we're not having net migration into the country the way that we used to. You could call that 2 million a year. My generation, the baby boomers are aging out of the workforce. I'm not aging, nor am I out of the workforce, but my generation is. And that's maybe a million three people, 65 and older, increase out of the workforce over the last three years per year. And then, you know, this temporary protected status thing takes some more people out of the workforce.

5:21And so it's possible that, you know, we're seeing zero job growth and that's going to keep the unemployment rate steady. But, you know, there's nothing wrong with being nervous about that. I think you also have to be nervous on the inflation side. And we weren't at 2 % before all the tariff talk, all the tariff stuff's coming in. It's not hitting inflation nearly as much as some people thought, but people are still passing it on. You would have seen Walmart's earnings report yesterday where they talked about it or Home Depot or, you know, people are talking about - No, Walmart basically said it's coming.

5:50It's coming. Now, it doesn't have to be as severe as, you know, people like to think, and we can talk about that if you want, but it's coming. So So I like to say monetary policy is really easy three quarters of the time. When inflation's high and unemployment's low, raise rates. And when you have the opposite situation, lower rates. And if inflation's low and unemployment's low, you can spend a few more days at Jackson Hole. But if you're going to have risk on the inflation side and risk on the employment side, that's when it gets hard. Talk to us about your interpretation of Powell's speech.

6:21Because it does seem like actually there is not consensus on how, quote, dovish it was. the market surged. But when you heard it or when you read it, I don't know when you saw it, whenever you, do you get it in advance? I'm just kidding. So you read it at the same time as we did. What was your read on it? So I think you guys are all incredibly talented and much more talented than I am at interpreting speeches. So - Come on. He's being very diplomatic. Believe it or not, I actually gave a speech last week and one of the Fed commentators went through my last paragraph and compared it to my last paragraph before and said, see Barkin has changed in these ways.

6:57And I'm like, huh, that was really well done. I, you know, I was even sophisticated. So the commentator was correct in a way that you actually yourself had. I hadn't thought about it. Okay, respect. So, so when you guys read these speeches, I mean, the commas matter, the sentences matter. That's really our call for what it's worth. That's our colleagues who are commas, but let's give us, let's hear your team. And I, and I'm sure Jay's very sophisticated in his team. So I'm sure they're also thinking about this. So I'm not saying people get it. No accidents. But when I read it and when I heard it, I actually heard it live for the first time, so I didn't read it before it came out.

7:28It seemed like a perfectly down the middle speech to me. If you had asked me what the markets would have done, I guess I would have imagined that they'd read it as modestly dovish. It seemed like I read it as more dovish than I heard it. But what do I know? I mean, I've just listened to the speech like everybody else. Well, I mean, this kind of begs the question, but Powell could easily have just said, you know, we're data dependent and we're going to wait for the next CPI number, the next payrolls number. Instead, he chose to really emphasize the labor side of the dual mandate. Why? Why is that?

8:00I mean, you'd have to ask, you know, when he comes on the show. Yeah. I know you'll have a lot of questions for him. Tell him he should come on the show. I will say one thing that's odd about Jackson Hole every year is it's the period where we have the longest break between meetings. Right, right. And this time, not only do we have a long break between meetings, but the day after or two days after his press conference, we got these big revisions on the job report. So I don't know, maybe you could imagine there was a trying to mark to market the press from the press conference to here. I don't know.

8:26I mean, he knows what he does. Something that came up in our conversation with Jeff Schmid was this idea that, and I'm curious how this sort of jibes with what you've been hearing from businesses. You know, when we talked to Mary Daly in Alaska a few weeks ago, she said, you know, the revisions made sense to me, actually, kind of like what you're saying, because actually, this is fitting with the anecdotal commentary that I've been hearing. And intuitively, right? Post-Liberation Day, lots of anxiety, uncertainty. Yeah, it makes sense. There'd be a hiring slowdown. However, something that Casey Fed President Schmidt said was, yes, it fits, but, well, the uncertainty is easing now.

9:05Tariffs are not as uncertain as they were in the middle of April by any stretch, even though there's new headlines almost every day. There's nowhere near as much uncertainty. And then maybe that was the cycle low for the year that sort of April, May, June, July period. Does that seem plausible to you based on what you're seeing out there? Yeah. So I've been describing that as driving in the fog. And I've been saying that when you're driving in the fog, it's hard to put your foot on the gas because you don't know what's around the next curve. And you don't want to put your foot on the brakes either, because you don't know what someone behind you is going to run into you.

9:38So you pull over and put on the hazards. That's a money analogy I've been using for a few months. But what I've been saying the last month is I think the fog is lifting. And I do think you know what's happening on the immigration side. You know what's happening on the deregulation side. Different sectors have different points of view on that. We have a tax bill, so you know what that looks like. And people have, at least what the boundaries look like on tariffs. Now, I don't think they're ever going to be once set, done, and we'll know the rules for forever. I think it's a tool that is going to surface again and again.

10:10But I think people sort of know what that is. And so when I'm talking to businesses, it feels like it's shifting. Now, I'm going to now torture the analogy because they think the road's bumpy, right? And so I still hear a lot of not hiring, not firing. I'm going to be a little cautious with my costs. I'm going to do it through attrition, not through layoffs. I still hear that. I've heard a few stories of leaning into investing, particularly supported by some of the depreciation stuff. I've been waiting for this tax thing to pass. But I wouldn't say not at scale, modest amounts of it. The one place where you might be seeing this sentiment change is on the consumer side.

10:48And I've been hearing from the retailers I'm talking to and from the manufacturers I've talked to of a lift in consumer spending starting in end of June, into July. If you look at the credit card data, you'll see a big increase in July, which has continued the first two weeks of August. It would make sense that a bunch of consumers who, by the way, still have jobs, real wages are still up as inflation comes down, and the markets are obviously healthy, both asset valuations and houses or stock market, all very healthy, that they might have taken a step back in the context of all the news in April and May, and maybe now they're coming back in.

11:23So that's the one place I'm starting to see movement. I'm very attentive. We'll get the PCE next week. Very attentive to what we're seeing. But you could imagine a temporary air pocket as consumers sort of pulled back, worried, and you see this in the consumer sentiment data, that inflation was going to hit huge numbers. And all of a sudden, people were going to be unemployed and they were going to have issues. And now they're not seeing it. It's possible. Do you think that we're maybe getting a bit of a reacceleration in the economy at this point? Because you look at retail sales, they were very strong.

11:52As you point out, you look at the city economic surprise index, that's been ticking up. Some of the regional surveys are starting to improve a little bit. Do you see that re-acceleration impetus? It's possible. Like I said, I sort of see the energy on the consumer side. We'll see how long it lasts. I think you can call a re-acceleration when you get there. I definitely am not talking to businesses who are talking about blowing out earnings. I don't hear one of those kind of accelerations. I don't hear frothiness yet, but I am hearing some very positive vibes on the consumer spending side, which I'm pleased to hear.

12:25If inflation is warm, and maybe if there's upside risk still to inflation, why? Could there be more to it than just, yeah, tariffs are right, maybe. But could there be something more going on? And perhaps that consumer strength, pretty large deficit still, even with the revenue that's coming in from tariffs, maybe someone like the AIS spend. I don't know. What do you think is the story on inflation? How much is tariffs and how much is other stuff? Well, so I just think it takes a long time to get inflation back to 2%. If you go back and look at the Volcker years, and of course, he did stuff to the economy that was much more aggressive than what we did.

13:01And he, of course, had inflation that was much more ingrained and didn't have an inflation target. But he took rates up a lot. Inflation came down a lot. But it didn't get to 2%. It was 4%. Oh, yeah, yeah. And it sort of eked its way down from 4 to 3.5 to 3 to 2.5. Throughout the 80s and 90s. Exactly. For 20 years until it sort of hit 2 and sort of started sticking around 2. So I give you that just for perspective. And again, from my experience, I'll tell you why that happens, which is people don't just immediately go back to the old number. You've got some amount of catch up to do, wages and prices, people who didn't raise it.

13:35People's expectations, I think, are very significantly triggered by actual inflation. And so my old job, we had to raise prices every year. And we sort of thought about it. And a lot of times we raise price based on last year's inflation. And so it just, there's some stickiness to it. And so what we've seen is very encouraging on the inflation numbers. They've gone from seven at their peak down to somewhere in the high twos. Maybe it'll tick up to the three now. And so I think that's one piece of it. Actual, it's sticky. It takes a while. And then the second piece of it is I do think you've got this tariff concern in there and that people are passing on costs.

14:09And then people who don't even have the costs are using this as a cover to pass on costs. So just real quickly then, if there's all these factors, et cetera, why is there conversation about cutting rates? Or if there is conversation about cutting rates, how seriously should people take this 2 % commitment? Well, so there's calibration going on. So you've got unemployment that's low, but may be turning up. You've got inflation that's been coming down and may be ticked up, but maybe for one-time reasons. And you've got a neutral rate that is, by all accounts, lower than where we are, but lots of debate about, is it just a little bit lower or is it significantly lower?

14:45And so I think those three things go together. And people just ask, do you recalibrate to a different number in the context of this? Or are we well positioned where we are? This discussion actually reminds me, what's your story for why inflation did come down in the post-pandemic period? Is it the sort of immaculate disinflation explanation where the supply chain pressures just started dissipating? Or did the Fed's actions actually have a kind of sledgehammer effect here? I think it's an all of the above. I mean, if the Fed doesn't act when people expect us to act, then I think that sort of unwinds expectations in a way that's not very helpful.

15:22On the other hand, you can't ignore that a lot of the supply constraints that were driving prices up, commodity prices, ships backed up in harbors, chips not in cars, people not at work, those things also ameliorated. We also had a really big immigration number for about two years that meant the supply side, jobs got filled a lot faster. it definitely released the pressure on a lot of things. So supply helped. Hopefully the Fed did its part and the combination of those things brought it down.

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18:07Crypto trading provided by Backed Crypto Solutions, LLC. Complete disclosures available at public.com. When we were in Alaska, we learned that there is a major furniture expo every year in your district in North Carolina. And also North Carolina is like, I think if people think of like regions that have lost from trade or regions that got hit really hard by free trade, I'm not even sure if it's true, but certainly that is the perception. It's actually, it's your district. Well, this is one thing we learned by traveling with Tom and going on some of his trips to talk to local businesses. There is a sense that manufacturing in North Carolina has been hollowed out.

18:43Absolutely. It's a very short sense. But there's also cities in North Carolina that are some of the most dynamic in the entire country, especially over the last couple of decades. But I'm just curious right now, like tariffs in your district, what do you see? So no question, historically, the textile industries, the furniture industries got hit very hard. If you look at the Carolinas, though, and you took it the last 25 years, you'd say there's also been a lot of foreign based manufacturers that have put manufacturing sites. I'm thinking of Greenville, South Carolina, Spartanburg, where I was last week, where you've got BMW and big auto manufacturers and their whole supply chains coming into town.

19:19What we hear right now is it's very different by sector you're in, and it's very different by your position in that sector. So there are a lot of people who manufacture in South and North Carolina, but they source abroad and they're very worried about their costs. Think of the big auto manufacturers. There's a lot of people who manufacture in North Carolina and they're 100 % American made and they think this is the greatest thing in the world because they'll get protection for their sectors or the people on the other side who've been putting low cost. So it's very, very dependent on where you sit.

19:49Well, speaking of specific sectors potentially benefiting, there are loads of tariff headlines still coming in. But one of them that caught my eye was Trump saying that he was going to start a furniture tariff investigation with a view to setting tariffs on furniture imports into the U.S., specifically to help North Carolina. What's your immediate reaction when you see a headline like that? Well, we've been seeing a lot of headlines on the tariffs thing. So first thing I don't do is I try not to surf headlines too much. We'll see what tariffs get applied on what industries, with what duration, on what products.

20:26And that's what a lot of the manufacturers I've talked to also do. I'm sure the people who manufacture furniture in North Carolina would be very supportive. There aren't actually all that many. A lot of jobs have been lost. And I think if people start to consider bringing jobs back, the thing you hear about over and over and over again is just availability of workforce and the cost of workforce. The jobs that I think are most likely to come back are ones that are the least dependent on workforce or have the highest skilled workforce or have high paid workforce. And a lot of these jobs have gone to places with very low cost workforces.

21:01And I don't know the level of tariff that one would need to get to, to bring those jobs back, but it's a pretty significant number. The other thing that's really not talked about much that I just think is interesting. I was in Hickory, which is a factory town. I talked to a lot of furniture manufacturers there and they're looking for workers. This is during the COVID and they were having a very strong demand cycle. but I went to community college I talked to a bunch of workers there and I said well you guys trained to get in the furniture industry and several of them told me you know my dad was in there and got laid off and so we're not going there you know the thought that people are waiting to go back into the job stability matters a lot too and so as we bring jobs back in the country which would be great and I hope we do making sure they're stable jobs and they're jobs that are going to be around for a generation is very important I think in terms of getting workers into the jobs.

21:49We are recording this the day that Chairman Powell gave his final speech as Fed chair at Jackson Hole. It was a policy speech, and he did not talk about Fed independence and the attacks on Fed independence that are coming from the White House and so forth, or the political pressure that the Fed has been coming under. When you think about inflation, maybe not in the short term, maybe not the latest PPI reading or whatever, but when you think about the long-term, like the ability of the Fed to maintain that 2 % inflation. Do you think about like, well, will the US political system have the sort of stomach to preserve a Fed as an independent agentic force in the economy?

22:32Well, so we've all relearned something in the last five years that we didn't know we needed to relearn, which was how much we hate inflation. And inflation, it feels unfair. You get a raise and then the money gets spent somewhere else. It creates uncertainty. And frankly, it's just exhausting. It's exhausting to deal with people who are trying to raise your prices or to shop around for better prices or deal with vendors. And so if there's one thing I think the American people have aligned on over the last five years, it's just how much we hate inflation. And there's been a lot of work done in a lot of countries in terms of what's the best way to get inflation under control in an independent central bank is the answer to that question.

23:09The research is very powerful. But do you worry that over the medium term, that the sort of political system that has allowed for an entity like the Fed to exist and operate outside of the electoral cycle is under stress? I hope and I expect that this country is going to recognize that Independent Central Bank is the best way to get under control the thing which we hate the most. Just on the people hate inflation point, which I think is a very salient idea, You've been very vocal on the idea of companies having learned the inflation playbook, right? They tested price elasticity during the last round of high inflation.