Bloomberg Audio Studios, Podcasts, radio News.
Hello and welcome to another episode of the aud Lots podcast. I'm Tracy Alloway.
And I'm Jico Wisenthal.
So, Joe, we have a treat for authoughts 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 odd Lots 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, and we're going to share that portion of the interview with you right now.
So, so far in twenty twenty four, 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 too, is 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, and so the economy in general still seems to be very healthy, and I think a lot of people wondered whether, you know, we weren't at the end of a growth period. Still seems to be strong.
At the same time, inflation has remained stubbornly above three percent, you know, on a monthly annualized rate, and you know, 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 one point nine percent headline inflation. The last three months have been somewhat higher.
If you took the ten month number, it's not that bad actually, and so I think the overall story that inflation's moderating is still the right story. But I've been of the view that inflation has been will be more stubborn to come back to two percent 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 in 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 in shelter, and that's what's happened in the first quarter year. Is 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 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, and that would be great. If it doesn't come down and you want to get to two percent, then either goods or services or both need to run at less than their historic
levels of inflation. That's just simple, simple math. And if it doesn't come down, that's what you'd be looking for in 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 two thousands, we had healthcare inflation that was quite significant and much
more than it was in the nineties. But you know, goods price deflation came down, so the basket does shift, and it's fine if it shifts, just needs to get to two percent.
Overall, there'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 reaccelerating, and you know, having conviction that you need to do.
And when like, I mean, okay, so we've had this little three month pick up from the previous seven months, what is like, Okay, this is actually inflation reaccelerated rather.
Than just a durable trend versus a blip.
Yeah, what does that look like? Well, put, I'm gonna 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 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, woul lead to pressure on prices such the things we're escalating, and 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 is has come down and it's still coming down on a twelve month basis, but it is stubbornly you know, 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 can come up with scenarios where those 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 remain stubbornly high. So I think, to me, the polsipath 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.
Right, so there are many financial conditions indices, some of them show looser than others. The ones that seem to sort 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 RVs, RV garage covers are a big part of what he does. And of course RVs went crazy, but people aren't buying r v's at the same pace anymore. So I do see interest rates going to the economy,
and I see that answering. But I also think it's fair to say the level of re strictness is something you take at some faith. I do like to look at you know, real tip yields to give me some sense, But you are comparing it to a hypothetical, not a hypothetical, a estimated our 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 are stars. So yeah, be open to the notion that the level of restrictiveness is less than you think. And 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 as you're as 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 you know, housing obviously just you know, 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. When you're thinking about rate policy, how much like do you think about now 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. In theory, that means housing more scarcity in twenty twenty six 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, and 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, you know, twelve bids per house, houses going for forty thousand dollars over list, and you know, so low rates wasn't the answer to
that particular supply and demand issue. I think this 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. I think that's the theory of the case. I'll point out that in this and I mean you mentioned multi family, but single family starts are quite strong, been 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 we're stuff still getting built. There is a future potential challenge and supply, but I think the hope is that, you know, demand comes off enough that we can bring that market into better balance.
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 seventies. And I remember the seventies. It wasn't pretty. I also had bad hair in that era. But you know what happened in the seventies. 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 the economy is even more. And so letting it 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 seventies and and much like me, the seventies weren't pretty.
Just because you mentioned our 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 of weeks ago, but they basically suggested that maybe our star is that our stars time in the spotlight has kind of come and gone, and the ideas that while 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. Does our stars 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 have to 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 orbust, than you ask yourself the question whether your prior assumption was right or not, and if it comes in south of where you thought, which is what happened for most of the twenty tens, then you ask yourself the question of whether your estimate of our star was too high. And so most estimates in the twenty tens 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 we if our economy continues to be as robust 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. A higher productivity economy is a higher trend growth economy, which would do it. You might argue fiscal you know, has some thing to do with it, and certainly we're at a different level of fiscal spend today than we were in the early twenty tens. But again I'm not going to profess to be the expert on that.
I ask a question, why is it two percent?
Is it because of the expectations part is more important than the actual number. That's like you're trying to set up. So there was a debate, you know why two percent? There was a debate in the nineties actually, and the Richmond Fed was right in the middle of it. Al brought us about what the right target should be. Interestingly, 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 the way, all the way till it was announced in twenty twelve. 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, it seems to have worked for thirty years. I 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 two percent number. A good example would be encyclopedias. Used to buy and 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, you know, three hundred and ninet nine dollars 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 is taking the set of things out of the index that you know deflationary. But 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 it 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 you know, tends to stagnate, and that's Japan and what has 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. And so we're out there trying to hit a target. If inflation is at three and you decide new targets 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 thank you so much. That was fantastic.
No, I love you guys. Great to 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 Wisenthal. You can follow me at the Stalwart. Follow our producers Carman Rodriguez at Carman armand Dash, Ol Bennett at Dashbot and kill Brooks at kil Brooks. And thank you to our producer Moses Ondom. More odd Laws content go to Bloomberg dot com slash odd Lot, where we have transcripts, a blog, and a newsletter that comes out every Friday. And you could chat with fellow listeners in the discord twenty four to seven Discords GG Slash.
Out Lots and if you enjoy odd Lots, 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.