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Joining us this morning, Richmond fed President Tom Barkin here on Bloomberg Television and radio worldwide, and on radio they can't see it, but on television people can see.
You have a bit of a bandage on your head.
You just had one of those older people's kind of operations.
Yeah, there's no truth that it was what happened in the last meeting.
All right, Speaking of the last meeting, we came out of that believing that, or at least Wall Street, that you're going to cut rates again in October and maybe in December. But since then, we've gotten some numbers that show GDP is hotter, inflation is still running hot, and the job is claims numbers suggest companies aren't laying anybody off. So should we have less confidence in the path going forward?
Well, I don't think you can mark to market the next meeting every week, even though that's what the markets do. I mean, let's see what happens on the on the employment side. We'll get some important data in a couple of minutes here on the inflation side, and I think we'll get there when we get there.
Well, the majority seem to believe, at least according to what the Chairman tells us, that inflation is going to be a one time rise in the price level.
And overnight we got a bunch of new.
Tariffs, as you just saw on a lot of different things from the President. How much confidence do you have in any kind of inflation forecast at this point?
Not much.
I mean, what I definitely see happening is there are cost increases that suppliers want to pass on. There's no question about that, and tariffs are a big part of it. But you could put health insurance in other other costs in there too, But those costs are going to attempt to get passed on to a consumer who's frankly exhausted of price increases. And so you know, we're seeing a lot of trading down, you know, branded to private label kind of choices, but we're also seeing people trade off.
And it wouldn't surprise me at all if people who are forced to accept certain price increases therefore something else on the other side, and that's your classic relative price trade off, and that may mean that you won't see as much broad based inflationary impact as you'd see. You know, price increases on particular items we'll.
See, and yet you get PCEE in an hour and basically you've already calculated the numbers. Inflation's not moving in the right direction. So can you still justify or how long can you justify cutting rates in that environment?
Well, we have inflation moving in the wrong direction.
Unfortunately, we also have unemployment moving in the wrong direction. And that was the backdrop of the last meeting. You have to ask yourself, you know, how are the risks still the same as you saw them two three, four months earlier, when you had unemployment in the right direction and inflation in the wrong direction.
You know.
My overall thesis though, is that while it's not, you know, ticking in the right place, the downside is relatively limited. I see, the inflation downside is limited by this customer pushback that I just talked about, also productive, which I think is we're seeing that at real scale, and so that means there's less pressure to pass costs on. And then on the unemployment side, obviously, labor supply is dropping at the same time as labor demand, and that's keeping
the unemployment rate relatively balanced. And that's the combination of immigration and ravocation of temporary status also, you know our generation, Mike, which is leaving the workforce.
I mean, you're seeing a million three.
More people over sixty five out of the workforce every year, and so you've got less labor.
Demand, low hiring, low firing environment.
But you've also got less labor supply, and that probably means that the unemployment rate increases are going to be relatively limited.
We at least you and I are still employed as of today.
We'll see how this interview goes.
You suggested that companies in your district are beginning to feel a little bit better, or at least some of the uncertainty has come off of their planning and their thinking. Are these kind of big new tariffs that we got today just going to change that mind has the idea that ongoing tariffs and ongoing disruption are going to be part of this administration and economy.
Is that in their planning.
Well, I've been describing it as a fog that's created uncertainty, and I definitely think in the context of the last couple of months, the fog has started to lift. Businesses don't know exactly what the tariff will be on their sector necessarily.
But they kind of have a sense of the range.
People aren't really following the news every day, you know, the same way they were back in April. And a lot of businesses I talk to say, look, I've just got to do something, you know, I've got to take action. I can't be on the sidelines forever. So I am seeing people more in the game now. If you're in a particular sector where you see a new announcement, of course that's gonna set you back. And so you know, what I say about businesses in general is not true
of businesses in every sector. And so there's sectors with a lot more clarity and sectors with a lot less clarity. And that's I think just going to be part of the game here.
This morning we had an investor on who basically said markets are rising because of the idea that a year from now rates will be substantially lower. Is that the right way to look at it? The wrong way to look at it?
Oh?
I wouldn't know how to think about, you know, how markets ought to rise or not rise. I mean, we're very much focused on trying to land the plan here and balancing inflation unemployment. As I said, I think both of them have ticked in the wrong direction. But on the other hand, the downside is limited and we're just going to have to, you know, adjust our stance as we learn more.
Well, where's your dot?
What are you thinking in terms of the next couple of meetings? And then for twenty twenty.
Six, Well, I really like the DOT process for me because it's a if forces real integration of your thinking in terms of where you think the economy is going, where you think policy is going. But I don't have it as a forecast prediction. It's not, you know, something I like to talk about publicly because it adjusts. You know, we do mark that dot to market as things go.
So you know, every meeting for me is one where I want to stop and look at the balance between how we're doing on the inflation side of the unemployment side and make the right decision.
Well, the story around the FED this week has been, shall we say, the debate over where the neutral rate is? Where do you think it is? And how fast would you want to get there?
Well, you know, I've seen a lot of the stuff that's been in the press, and we're studying that, and you know, I always try to understand all arguments and figure out how to integrate them into my thinking. I'd point you to the Richmond Fed neutral rate, the lubric
mathis model. It takes a lot of signal from what you see in the real economy, and in the real economy over the last couple of years, what you've seen is interest rate I mean interest rates go up and the economy stay relatively healthy, and so that model doesn't take a lot of it doesn't It has a relatively high neutral rate because it takes a lot of signal from the current environment. Now things can change, but that's where the Richmond Fed model is right now, and i'd.
Point you to that.
What number do they have where you it moves around based on what's happening in the economy.
Well, that gets the next question is Chairman Powell saying that you really don't want to target the neutral rate because it moves around, also saying that for any voter to really move things around, you have to be incredibly persuasive. Do you find Steven Myron's arguments persuasive.
I'm looking forward to digging into them with my team, and I like every voice in the room and every argument in the room. You know, that's what we do as a discipline as we sit down and try to take those arguments apart and figure out which parts of them really resonate with the way we think about things and which parts don't.
We're looking forward to doing that.
Is on the neutral rate, you know, in general, I just want to agree it's not that useful as an operational tool.
The models out there, even the one.
That I talked about, have a confidence interval of about two hundred basis points, and so you could say it's three, which is a the SEP media, and you could say it's.
Three and a half or two and a half.
But if you add a two hundred basis point range to it, you say, that's not that helpful for making operational decisions on monetary policy. What is more helpful, and the reason I favor in the model we've gotten Richmond, is how are you seeing the economy react real time to the level of rates you've got in the market. And if you see it weakening, that's a signal that maybe you've got it too high.
If you see it relatively strong, that's the signal. The other way.
Logan went to Richmond to announce her idea of changing the operational rate for the FED what do you think of that?
Well, I appreciate Laurie making the trip. We had a balance sheet conference yesterday that was very well attended and I thought lots of thoughtful papers, including hers, and I thought she made an extremely articulate, well reasoned argument, and I'm looking forward to digging into it further.
You anticipate the FED making a change, Oh, I don't know.
The Supreme Court if it allows the President to fire Lisa Cook?
What does that mean for the Fed?
Well, the judicial processes, local processes will operate, however they operate. What I do every day is show up and try to argue for the best monetary policy we can and make the case, as you said, in a persuasive way to my colleagues, and that's what I'm going to continue to do.
Well, let's leave it with this, What is the best monetary policy right now?
Continued rate cuts or do you not know? At this point?
I think you have to be very adaptive to what's playing out here. The world I've described as one where the labor market is weakening. It's a low hiring environment, but the labor supply is also short, and you have to be very attentive to that. Balance because it could get out of balance right. Similarly, on the inflation side, you do have these cost pressures and four and a half years of inflation over target. On the other hand, you're not seeing that show up and spikes and inflation
in the real time numbers. We are seeing what seems to be a productivity boom. And so I think you have to be very attentive to how little we know about how each of our mandate very is going to play out. And so, you know, I feel like very adaptive is the way to think about it, as opposed and that's part of why I'm not being prescriptive into well, it's this many dood cuts over this period of time, because I think we're going to see and learn a lot as we go here.
Tom Barkin, thank you very much for coming up to Washington and joining us this morning here on Bloomberg