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In this executive profile, and in a moment we will engage again a discussion with the FOMC, the Federal Open Market Committee voting member and the Richmond Fed President, Tom Barkin.

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(exciting music) On this edition of "Carolina Business Review," an executive profile featuring Tom Barkin, President and CEO of the Federal Reserve Bank of Richmond.

(exciting music) - Hello, welcome again to our program.

We are honored to have a banker's banker and the President of the Federal Reserve's fifth District, Tom Barkin, President Barkin welcome back to the program.

- Yeah, it's good to be here Chris.

- It is anything but not in, it is a very interesting time right now in the finance of this country and certainly given that the Fed's decision just this past week with the unchanged was to move ahead with unchanged rates.

So President Barkin, let me do a couple things 'cause we wanna unpack where we are right now.

We've had some key economic data, we've had the ISM, we've had jobs, we've had employment, we've even had a little bit of wage growth.

And we'll unpack that.

Knowing what you know now, given all of the data in the last few days, would you change the vote for non-movement of interest rates to poss, in September to possibly lowering rates?

- Well, I don't know if you're asking about whether I would've changed my vote two days ago or whether I'd have a different vote two months from now.

I'll never change my vote two days ago 'cause I made it.

Two months from now, I don't try to pre-judge meetings.

We're gonna get a lot of data between now and September.

Two whole rounds of jobs reports, two whole rounds of inflation readings, a lot of activity metrics.

And we'll make the best decision we can when we get to September.

- Is there, there's so much hyperbole and there's so much activity around and when you look at the, not the economic data, but when you look at reaction in markets, capital markets specifically in the US, very volatile.

Do you think, I don't wanna minimize that, but do you think that's just more of a nuisance and an overreaction and does it factor at all into how you think about rates going forward?

- Well, I might distinguish the equity markets and the debt markets.

You know, the equity markets move up and down for lots of reasons, which include prospects for rates, but also a hundred other things that happen, you know, around the globe.

And I really try not to, I'm not sure I understand the equity markets and I try hard not to focus on 'em.

You know, on the debt markets, it is true that our policy takes effect by rates, not just the overnight rate that we set, but the one year, the two year, the five year, the, the 10 year.

And so I do look at the rate curve to try to understand whether the signal we're sending is being internalized by the lending community.

And so, I do pay attention.

Now, again, there's a lot you don't control.

We had an SEP that came out last December that suggested the median member thought there would be three hikes, the market in three cuts this year.

The market immediately started pricing in six cuts.

We can't control that, nor probably should we.

And so, I'm interested in where they are, but I really don't think we can control that kind of thing.

- Well, I don't wanna spend a lot of time on this because I know you just said you can't control it, but what the markets want and what publicly, those that are not just investors but run businesses want and what is good healthy fiscal management.

How do you keep a clear view of what people want but what the economy needs?

- Well, so for me, and you know this, I'm on the ground every day.

Here, we're together in Southern Pines I think next week.

You know, I'm trying every day to talk to businesses and consumers and try to understand what they're seeing in the economy and what they're hearing and what they need.

You know, for the last two years it's been very clear what people want and that's for inflation to get under control.

I mean, everybody hates inflation.

And it's been very clear to consumers and businesses that they want this thing put behind them.

You know, today you're hearing a little more concern, I'll call it, about the jobs market.

And so you're trying as best you can to take the data and calibrate it with what you're finding out real time in the economy.

That's where I try to get my balance.

- On the job study, it was 114, and we don't normally like to get that granular because of the program will air several times, but is the jobs number, was the jobs number weaker than expected?

Or is there, are there elements in there that you have to unpack a bit to understand what those are about?

- Well, the job growth was weaker than what most professional forecasters had forecast.

The unemployment ticked up to 4.3%.

There's an ongoing debate, you know, we're speaking at 9:30, that came out an hour ago, so maybe it'll be solved by the time this airs about how much of that was due to weather, you know, not just Hurricane Beryl but also inclement weather across the country.

I guess what I would remind people of is 114,000 jobs is actually, if you take a 10, 20, 30-year history, a pretty normal amount of jobs growth.

4.3% unemployment is actually a pretty low unemployment rate.

We've been through two years, two and a half years of very frothy labor markets.

And so we're headed back down toward normal.

The question is, of course, are we normalizing or are we weakening?

Those are two very different things.

It gets to the question of whether we're gonna plateau or whether unemployment's gonna rise from here.

Same question on inflation.

You know, inflation's way down.

The 12-month numbers now are about two and a half percent.

Is it normalizing or is it plateauing?

And those are the choices we have to try to understand.

Are inflation and unemployment normalizing or are they somehow headed to a place that isn't where you want 'em to go?

- Is your gut that it is normalizing?

- So on the inflation side, my gut is that it's normalizing.

And I've been saying for some time that businesses having gone through the inflationary experience, we're gonna be slow to come back to normal.

But what I'm hearing in the markets these days is much more normalizing.

If you hear from the consumer products manufacturers and look at their earnings, they were raising prices high single or even double digits a year or two ago.

They're now in the very low single digits and some of 'em are actually negative.

I've talked to multiple fast food providers who are talking about things only sell when they're on promotion.

The airlines have talked about over capacity.

UPS has talked about how people are choosing slower delivery options.

The hotels are full, but can't take price.

And throughout it all, you hear a story on the, of a consumer that is still spending but being a lot choosier over price.

They're a lot more price conscious and they're trading down, you know, Kroger to Walmart, whatever version of that.

Private label, I've talked to some folks in the Pee Dee region who've told me about trade down to private label.

They, the consumers are a lot choosier, they're a lot more price conscious and that's how you get inflation under control.

On the employment side, I think it's harder to know.

And what I'd say is going on there is people aren't hiring, but people aren't firing.

Okay.

And, that's not normal.

I mean the hiring rate now is back to 2014 levels.

The layoff rate is significantly lower than it was before the pandemic.

- So that means strong, that means a strong job.

- Well, so the net of it is we're seeing job growth.

But the question you have to ask is how long does a low hiring, low firing environment persist?

Now it doesn't have to weaken.

It could also strengthen.

If businesses start to think that hey, the opportunities out there are significant, I'm gonna start hiring again.

'Cause a lot of people are just not filling open jobs.

That's what's happening, and letting attrition move their staff down.

But if they say, I've got confidence I'm gonna hire again, then all of a sudden you'll see job growth rebound.

If on the other hand, as often happens, people say, well everyone in my sector is laying people off.

I'm gonna start laying people off.

Then you might see job growth diminish.

And so, you know, I'm a little more confident these days on the inflation side, at least in the near term.

Medium term we've got all kinds of inflationary risks.

But in the medium, near term, the jobs market, I think we'll see.

- Well lemme go to this idea that rates that the Fed held rates that you voted to hold rates in this last meeting, in the announcement this past week.

Do, is there a longer lag effect that we're not letting or that we're not watching for how those higher rates for longer actually will permeate?

Is there a sense of that?

Do people in general understand that?

Does the Fed even understand what that longer lag time is?

- So, Milton Freeman famously said, "Monetary work policy works with long and variable lags."

And that's clearly true.

I mean, the day after you increase rates 25 basis points or reduce rates 25 basis points, the entire economy doesn't just move on a dime.

Interest sensitive sectors tend to move faster than non-interest sensitive sectors for obvious reasons.

But take the recent hiking cycle, a lot of people refinance their mortgages or companies refinance their debt when rates were very low.

So just because we raised rates didn't mean your mortgage got more expensive.

If you had a 30-year fixed, you would just refinance.

So it just, it takes some time to permeate through the economy.

Same thing if we take rates down.

It'll take some time to permeate through the economy and that's what makes our job difficult.

I was having fun last night trying to think of analogies, so forgive me on this, but the Olympics are going on as we speak.

You know, if you think about the balance beam, congratulations to Simone.

But if you think about the balance beam, you know, you don't wanna wobble on the balance beam and if you lean too far in one direction and you correct, what happens is you lean too far in the other direction, you overcorrect.

And you know, the judges don't like that.

Judges like someone who runs a routine clear.

And we're constantly in the world of trying to balance on this balance beam because what we do today will affect stuff a year from now.

So you have to forecast a year from now and try to, if you will, stick the landing.

That's my last balance beam analogy.

You know- - It's a good one, it works.

- So try to stick the landing while you're dealing with that much uncertainty and that makes it hard.

And I often say we don't get it perfect and you shouldn't expect perfection in a world where you're actually trying to forecast the impact of stuff 12 or even 18 months down the road.

It's just very hard.

- So, a lot of the criticism now, right now, will be that the Fed did not react quickly enough.

It's probably gonna be withering for a while.

How do you not let that affect going forward, looking at the data, making a level-headed decision?

- Well, so I always assume there will be an equal amount of criticism no matter what we do.

And so if we had moved it the last meeting, we would've gotten an equal amount of criticism that said we moved too quickly.

So I think you can't pay attention to any of that stuff.

You just have to pay attention to what you're trying to do.

Which is, you know, over the medium to long term, get inflation under control, and you know, maintain maximum employment.

So you focus on the data that's coming in.

In my case, I focus hard on what I'm learning in the communities.

I'll say this, the economy remains very healthy.

I mean if you look at the GDP that came out last week, 2.8%, that's a very strong economy.

The supply side in this country has rebounded quite significantly.

Most obviously on the labor side where participation is ticking up.

Immigration has come in, so there are a lot more workers and that's contributing to a somewhat higher unemployment rate.

But you've got a healthy strong demand growth still, right?

And inflation's coming down, that's the big picture.

And the fact that the markets, you know, might imagine we should do a little more of something or a little less of something, I don't think that's actually the way to think about the economy.

I think it's, you gotta think about the big picture.

- Does presidential politics have any dramatic effect on decisions or dialogues that go on?

- No, it doesn't enter the conversation, nor should it.

I'll also say a researcher on our team did a paper that was kind of interesting where, you know, she wrote that the problem with trying to let elections get into the conversation is first of all, you dunno who's gonna win.

You don't know what their agenda's gonna be and you don't know what's gonna be able to be implemented off that agenda.

And so they're not economic variables that are particularly useful as you try to imagine, you know, 12 years down, 12 months down the road.

- Let's talk about the consumer.

You mentioned the consumer and it's a big piece of obviously the economy.

So what does consumer spending look like to you now and as an addendum to that question, what about credit card debt?

- Yeah, so consumer spending's very solid.

Month after month after month, you still see consumer spending.

Part of why they're spending is that the employed rate is so high.

So people have jobs and in many cases, like entry level workers, real wages are actually up because of how much the entry level wage has gone up during this period of time.

At the same time, the markets are very healthy and so people who have assets, whether it be your home or your stock investments, they're also very strong.

And so you've got, people have jobs, people have wealth, people are spending and we're seeing in the savings rate that people are spending into their savings.

- So not deficit spending, but savings.

- Spending into, spending the savings.

And that is, you know, the flights to Europe this summer are packed.

I mean people have money and they're spending.

That's not the issue.

You are seeing people though be choosier on their spending.

And you know, I like to drink Diet Coke.

Before COVID, you'd go into the supermarket and it would be 5.99 for a 12 pack and maybe it would be buy two get two free and now it's 9.89 for a 12 pack.

And maybe if you're lucky it's buy one, buy three, get one free.

And people notice that and people are making choices and some retailers describe that as consumer spending weakening and it's weakening for their product.

But this is just how high prices turn into low prices, which is consumers make choices and then people who price have to back off of them.

And so you see that price consciousness.

You mentioned credit card debt.

Here's the good news.

Credit card debt today is massively down from where it was in 2007 and 2008.

And so in the aftermath of the Great Recession, people deleveraged massively.

And then when the pandemic hit, the combination of, you know, COVID era repressed spending and all the stimulus payments, people paid down their credit card debt.

So credit card debt came down a whole 'nother level then.

And it's been rebuilding over the last two years.

It's now a little bit higher than it was before COVID.

It's still significantly lower than it was before the Great Recession.

And as a percent of the economy, it's still lower than it was before COVID.

So, it's something to watch because you know, if the slope looks like this, you worry whether it would continue.

But the level of credit card debt today is not at a worrisome level on a historic basis.

- I don't wanna get too academic, but given all of these things, as you talked about the Great Recession, you talked about COVID spending.

Do we really have a sense, and I mean the Fed as well, have you modeled in your own mind or has the Fed modeled the historic amount of liquidity that is, was dumped, that was allowed and is by the way, as you well know, still in the system and still being released.

Has that, what kind of distortive effect has that really had on the way that the economy truly works?

And how much does it change the way that the Fed thinks about this dual mandate?

- Well, so ton of liquidity got put in the economy.

Some of it was fiscal stimulus, some of it was asset purchases by the Fed.

Some of it was just people who didn't spend during COVID and then decided they would spend again.

But that was absolutely a critical part of the surge in spending, challenges with supply chain, and resulting inflation that we had, you know, starting a couple years ago.

We've been in the process of withdrawing, you know, our liquidity provision at quite significant levels over the last year and a half.

And we have models that do try to understand what the impact is.

The challenge is they're just models, and I think there's not a ton of precedent for this.

I'm pretty skeptical of, you know, some of the outputs of some of these as opposed to how big either way, you know, these impacts are and we're just gonna learn it by what happens in the economy.

Again, coming back to the big picture, we raised rates, we've held them for a year.

We've brought down liquidity significantly.

As a result, inflation a year ago, 4.7%, now 2.5%.

Job growth still at, you know, 114 or 4.3% at very normal levels.

So far so good.

Still have to finish the, we have to stick the landing.

- Let me go to a point that's also a big one and that is housing and the cost of housing and mortgages, et cetera, et cetera.

And before I ask you about the pain that people are feeling because they either can't or they have to refi or they won't refi or whatever the cost of buying a new house is here.

How do you, and again, how does the Fed think about, we wanna make it easier for people in the economy, but we also wanna allow this part of the business cycle to flesh out excesses.

- Mm-hm.

- And we wanna keep rates based X for that reason.

How do you balance those two competing things?

- So we've got one tool called interest rates.

- Yeah.

- It's an important tool and it works to keep inflation under control, but it's a pretty blunt tool.

And when you raise interest rates, there's absolutely a set of sectors that get hit first.

Interest sensitive sectors like housing, like automotive, like commercial real estate, those are the sectors that get hit first.

And that's not a design problem, that's just, that's what interest rates do.

It then bleeds through the economy over time.

And so some of these sectors are called cyclical exactly because of this, 'cause they are cyclical.

When rates go up, this happens, when rate goes down, that happens.

Housing in this country in this cycle has been significantly different than past cycles.

And I think that's because two things happened at the same time.

One, a realization that we underbuilt housing in this country for probably 10 or 15 years coming out of the Great Recession.

So we're very short supply.

And second is the post pandemic economy has just absolutely made demand.

It's just increased demand to, at an exceptional rate.

People working more from home.

So when you're working more from home, you care more about your home.

People have wealth, so there's more second homes, there's an investor segment that's buying homes and renting 'em as opposed to people living in them.

Millennials who had been living in apartments for a long time have aged and decided they wanna have a house.

And so the demand for housing went like that at a time where the supply hasn't much moved.

And of course that meant the price went up.

At the same time, huge competition for construction.

You know, not just in housing but in data centers and warehouses and those sort of sectors.

And so construction costs go up.

So you've got construction costs up, you've got interest rates up and you've got demand up and that's led to prices up and it's less affordable.

I did a speech at the Virginia Governor's Housing Conference in November that I liked it, I don't know anyone else did.

But it basically makes the case that we have a supply problem and we actually have to work hard on the supply of housing in order to bring affordability back into the conversation.

And to your audience, I'll say, 'cause I'm a windshield warrior, I get in the car and I drive up and down the district, you know, in the exurbs of Raleigh and the exurbs of Charlotte and the exurbs of Greenville and the exurbs of Columbia.

I mean, you're seeing a lot of housing getting built and housing's getting built in North and South Carolina at rates that are only compared to Florida and Texas.

Nowhere else in the country is building housing the way we are in the Carolinas, but there's still a way to go.

- How far does that go to close this historic affordability gap?

And is that overstating?

Is it a historic affordability gap?

- Well, people of our age, you know, like to talk about our first mortgage and it was 14% or 17% or 20%.

And so, you know, I always have to be a little careful saying we've never gotten there.

But I'll just say mentally people are not in the minds of feeling good about buying housing.

And that's the, I think the core question.

So, and that sentiment, if I could put it that way, is significantly lower than I can remember in my working career.

I wanna come back to, you know, what the Fed does and how that deals with housing because unlike most other rate increased cycles, housing and construction's still pretty strong.

And that's because people aren't selling their houses, the existing houses.

And so new home construction's up.

Normally it would plummet.

It would plummet quite significantly.

- Well, we always know there's a cause and effect.

So on the other end of that, when we've got so much inventory and then rates do come down a little bit, are we going to have much more inventory on housing and housing prices will flatten out or drop?

- Well, I think this is a real secular change in the value of housing to people.

I think if instead of being in your house two days a week, you're in your house four days or even five days a week, you're gonna care more about your house.

You're gonna spend more on your house as opposed to other things you might spend money on.

Most obviously gasoline and parking, you know, lunch downtown.

But I think across the whole basket, it's gonna matter more.

People will spend more.

So I do think you're gonna have a long-term increase in demand for housing.

And I hope, you know, whenever we get to the point of starting to lower rates, it doesn't increase demand for housing so much that actually prices escalate again.

That's one of the medium term inflation risks that I keep my eye on.

You know, I've told you I'm optimistic about the near term.

- You're a fed optimist.

- But the medium term, I think you have to be a little thoughtful.

The Middle East conflict would be another risk.

Demographics more broadly and the supply side are another risk.

And then I think this question of what happens to demand for housing, you know, if and when rates start to decline, that's another risk.

- Could it, could there be a black swan event and a global conflict that would totally upend the system?

- I mean sure, and you know this.

If you go back through our working careers, it's hard to find a downturn that didn't look like that.

I mean, the Great Recession, the pandemic, the Gulf War, 9/11.

You know, it's really been since the early eighties that we had a downturn that was, if you wanna think about this way, created locally.

Most of our downturns are created globally.

- We've got about three minutes left if that.

But, Tom is is there some timeline, is there a general idea that the Fed will sanction a cyber currency at some point?

- So we did a paper on this about a year and a half ago.

You can get it on the Federal Reserve's website that talked about a digital currency.

I think the most important things to take from that paper if you're, you know, not having trouble sleeping and therefore you don't wanna read it.

One is we've said we're not gonna do anything about a digital currency without the explicit authorization of Congress.

You know, a new currency should be, you know, legislatively mandated.

Second is there's a set of concerns that one ought to have about introducing one that go to the questions of what are the impacts on the banking system?

You know, are you gonna find in the next crisis if you have a digital currency that you know people are gonna take their money outta the banks and put it into this, these digital accounts and what would that do to the strength of banks, which you need during a crisis?

There are issues of what problem are we trying to solve vis-a-vis other countries.

People talk about China for example, but a reminder that China tracks the transactions of every user of their digital currency.

That's probably not where we want to go in this country.

So it's a pretty thoughtful and interesting paper if people are interested in it.

- Yeah.

Thank you President Barkin.

We always appreciate your time and I love the windshield warrior analogy.

- Yeah.

- Because I know you are on the road a lot and looking at a lot of the anecdotal evidence, but thank you so much for being here.

- Always good to be with you.

Thanks Chris.

- Yeah, thank you so much.

Thank you for watching our program.

If you have any questions or comments, you can certainly go to our website or YouTube channel.

Take your pick.

But we're out there.

Thank you for watching.

Until next week, I'm Chris William.

Goodnight.

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Thank you.

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