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- There is a lot of talk about the cost of goods and services, better known as inflation.

And a key part of the Federal Reserve, the US Central Bank's policy is to manage or head off inflation, or at least manage it.

On this program, we welcome back the President and Chief Executive Officer of the Richmond Federal Reserve District, Tom Barkin.

In a moment, we will start and stay with us.

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

(dramatic music) - Each year or so, we like to include a voice that has some leverage, a voice that also knows what's going on in the region, monetarily, business-wise.

We are glad to welcome back the President of the Federal Reserve District of the Federal Reserve, President Tom Barkin.

President Barkin welcome back to the dialogue.

Thank you.

- Yeah, thank you, it's always fun to be here.

- To separate out, sir, a lot of, and I'm just gonna call it hyperbole but certainly emotion around inflation, around jobs, around COVID, around public health concern, around housing.

If we try to put those all to the side, sir, what is job one for the US Central Bank from here, going forward?

- Well, I see job one as normalization and just for context.

This pandemic has been incredible, it's been two years.

And when the pandemic started, we put in place a set of, I'll call them emergency measures.

We took rates down to 150 basis points.

We bought multiple trillions dollars of assets.

We've helped solidify markets.

And much of that was needed during a time where unemployment spiked to levels that we had never seen in my lifetime but we're on the back end of this now.

Unemployment is now down, the most recent report, 3.9%.

Inflation which many of us were worried about two years ago was actually under our target is now meaningfully over our target.

And so in a world where our mandated goals are inflation, unemployment, inflation's high, unemployment is low, it's time for us to get back to normal.

So to me, the question is how to get back to normal.

- Federal Reserve chairman, Jerome Powell testimony on renomination to the Fed a couple of weeks ago as you well know, all but apologized that the Fed was not aggressive enough in addressing inflation and coming out before this.

And I'm not gonna debate that or ask you about that per say.

But when we, when we take a look at inflation as it is now and inflation's relationship and I don't wanna get too far down on the weight, sir, but the idea that we've got historic amounts of liquidity and cash looking for a place to go but yet still a lot of inflation, how do you balance those two ends of the barbell?

And it's gotta be a delicate balance.

Is it for the Fed?

- Well think short-term and think medium-term inflation.

There's no doubt in my mind that inflation today is being significantly driven by a set of factors having to do with this pandemic.

On the demand side, we've had stimulus at extraordinary levels.

We've had repressed spending during the shutdown, that's come back into the economy.

We've had a big rotation from services into goods.

On the supply side, we've had all the outages that, you know, you know and the listeners have heard about, boats lined up outside of ports.

And then we've had these constraints on labor supply, some of which are also related to COVID.

So we've had price pressures at significant levels across the economy driven in big part by what's happened in and out of the pandemic.

You notice, I didn't say cash and liquidity levels, okay.

Now in the medium-term, cash and liquidity, they do matter a lot and monetary aggregates do matter a lot in terms of what happens for inflation.

And so in the medium-term, the challenge is how do you get that under control?

How do you get rates in the right place?

How do you get money slide?

Those are the kinds of issues you've got in the medium-term, but I wanna make sure we separate those 'cause in the near term, I don't think that's, what's been driving inflation.

I think it has been the dynamics that you and I all know about in terms of supply and demand.

- Let's unpack the supply just for a minute, President Barkin, the idea that's, it's been, and I'm gonna say weaponized in the press because of the high emotion around getting goods on shelves, getting services as you said and the ports having a lot of boats backed up and economists said that we may be thinking about this wrong, it's certainly as a supply chain issue but it's more of a demand crisis that started in March of 2020.

How do you characterize that?

- Well, you know, both sides of right, there's demand in this and there's supply in it.

I think if you go back to April of 2020, the economy was shut down.

If you ran a manufacturing operation, you were worried about having too much capacity, not too little capacity.

We had state, local governments actually shutting down some manufacturers.

And so if you look at the economy in the summer of 2020, it was actually deflationary, non-inflationary.

We had unbelievably short demand and the demand was actually less than the supply that was being created.

Now the economy reopened and in particular in the spring of last year, spring of 2021 with vaccines hitting, it reopened enforce.

And when the economy reopened enforced, what happened is you had an extreme increase in demand.

That demand rotated as I said earlier, from services to goods.

And manufacturers, many of whom had constrained capacity during the shutdown, just weren't able to, to catch up.

And I don't blame manufacturers for that.

If I were a production planner and it was January of 2021, I didn't know if vaccines would roll out.

I didn't know if they'd be effective.

I didn't know, there'd be another $2 trillion of stimulus in March.

There was a lot I didn't know and couldn't anticipate for what was happening.

But what's happened, of course, is that demand has escalated and supply hasn't caught up.

Then on the supply side, it's not just the production planning part because most people, myself included thought labor markets would come back a lot faster than they actually have.

And you still have almost 4 million fewer people working than you did in February of 2020.

And those people are not working in part 'cause they've retired, in part 'cause they're taking care of kids or grandkids, in part 'cause they're worried about their health and COVID, perhaps in part because they've got money in their pockets and aren't yet ready to come back to work, perhaps they've had a life change.

And so, you know, that amount of the supply side, that part of the supply side, people just weren't ready for either.

So yes, demand is part of it, yes, supply is part of it.

And again, we just have a rebalancing we're gonna have to go through and I think that's gonna be the 2022 story.

- Yes, you referred to it here just a second ago, around this and I'll call it the great resignation because it's been coined that term.

Is the great resignation being miscast as just, and I don't wanna oversimplify it or diminish some of the angst around it, but as the great resignation, really a change in how labor and workers interact and become part of what this economy is?

- Well, I think of the workforce in three different segments, maybe this helps.

I start with skilled trades and of course that'd be plumbers and carpenters and welders but it would also be truck drivers and it would also be nurses.

And that's a group that was short before we started.

And COVID has only made them shorter.

Construction has boomed.

Manufacturing has boomed.

Obviously you've got the needs in the health healthcare system and truck drivers.

And we just don't have the manufacturing if I wanna put it that way in place to catch up with what we need in terms of demand, that hasn't been a change.

We don't have truck drivers leaving the economy, I don't think.

This is about, we just haven't manufactured that's with people in the skilled trades.

Then you've got the second segment which I'll call lower incomes personal service workers.

Millions and millions, and millions of them were laid off in April of 2020.

Some went on to other jobs but many of them, you know, having now been called back to work are not coming back to work.

And I do think that segment has changed its view on what it means to work in that sector.

Maybe it's health concerns.

Maybe it's not wanting to wear masks at work.

Maybe it's having found their way into other careers, but that's the place where the economy is short.

That's where the 4 million people are.

And you could characterize it as a life change but it's not a life change.

It's, you know, a job that looks stable before is no longer stable.

A job that looked healthy before may not look healthy.

And there are other alternatives out there.

The third segments, the professional class.

And unfortunately when most of us read about the great resignation, we're thinking about ourselves.

That segment is tight but it's not so tight that it's at historic levels of tightness.

You do see some resignations there but you're not saying the quit rates or even the wage escalation in that segment, the way you are on the other two with the exception of some places like, you know, artificial intelligence and cyber and cloud transition.

And that's the place you have to worry about but I don't think yet we're seeing that sort of massive life change.

- President Barkin, we're gonna jump around here a little bit but I wanna make sure that we do, while we check all these boxes.

And before we go any further, if you're watching this program, this is actually being recorded here in mid January, January 14th to be exact.

And you are watching it now at least on February 4th, if not later.

So it's important to know that these comments in respect to that.

Lemme come back to the cash just for a second, President Barkin, the idea of so much cash, so much liquidity.

And I don't mean just Federal relief but low interest rates, of course, as you well know, how much distortive effect does that have on this current economy and how do you discount that effect of all of that cash waiting for place to be placed?

- Well, I do think there's a lot of, I'll call it artificiality in the economy that includes fiscal stimulus which has gone into lots of different places and has both created demand and inhibited supply that would include COVID which has both rotated demand and effect a supply.

And of course, low interest rates, you know, have an effect.

Now, there are interest sensitive sectors, housing would be a good example, you know, automotive where lower interest rates do, you know, motivate people to buy, it makes it cheaper to buy something.

So I think that's very much real.

Now, one thing that's interesting is that lending isn't really element.

So the other way you would think low interest rates would lead to a lot more borrowing.

But maybe it's COVID, maybe it's the stimulus programs.

Consumer credit with the exception of mortgages hasn't really elevated.

In fact, people have paid down their credit card bills.

Commercial credit and volume of government debt is up.

I'm not sure it's that.

But I don't think you've seen the full impact because of these other, I'll call it more physical factors, both the fiscal stimulus and the COVID impact.

- What of interest rates, rather how much of interest rates driven real estate prices, both commercial but specifically residential?

Half, 60%, 20%?

How much do you think has been the motivation on what's going on in a spectacular real estate industry?

- Well, I think there's no doubt that mortgages are less expensive if, you know, the cost of a monthly payments is less then you can buy a little bit more.

But it sure seems to me that what's going on is an entire society was stuck 24/7 in their house and there's just no way to understand the flaws of your house any better than living in it, 24 hours a day.

And so people in apartments situations decided they need to buy a house.

People in New York decided they needed a second house.

People moved from the city to the suburbs.

At the same time, a generation of millennials that had decided not to get into houses coming out of 2008, got to the point, started having kids and decided they really needed a house.

And even the supply of houses were short because, you know, I wasn't gonna move my mother from her house into a multi-family situation during a time of COVID.

So again, the physical demand supply factors, I can't say the cost to me doesn't matter but I think the biggest driver of demand has been this need to get a better house.

- Are there any conversations that go on in a formal FOMC meetings or some of the informal conversations that you have around the district that when the economy does turn and the economic cycle does again rear its head on the slow side, that we will be faced with large homes and maybe even with the low cost of funds here, President Barkin, that we could get into a situation where people can't afford it.

Is that a problem?

- We'll see, you know, how all this plays out.

I'll say the other thing I didn't mention is for 10 years post the crisis, we also didn't have that much construction of homes.

And so I do think it's a market that as we all know was massively bushwhacked in 2008, 2009 and it's just taken a long time to come back.

And so 10 years of under buying, 10 years of under building, we finally caught up.

And so I don't have the sense that the supply that's being put in the market today is gonna overwhelm the demand that's still out there that's unsatisfied.

Of course, there's some point in the future where those lines could cross and you would see it.

But, you know, on my list of markets of concern, the housing market's not, you know, at the top of it.

I'll also add leverage ratios and that market are nowhere near where they were 15 years ago.

And so, you know, people are not as levered up in their houses.

And of course that's your risk.

It's not just valuation dropping, right?

It's valuation dropping at a time where you've got more leverage than you can afford.

And at least so far what I see seems okay.

- Wait, shifting from the residential side to the commercial side, you've got commercial developers, owners of properties saying that they haven't seen cap rates here, five, 5 1/2, six max, but around the five is where cap rates are in markets like Charlotte, Raleigh, Charleston, Greenville, South Carolina, of course, Asheville, all of these markets are high growth markets.

Is that a permanent change, sir?

Do you expect those cap rates to go back up or is just this a new high watermark that we'll have to assimilate what part of a commercial real estate is now going to have to be that way?

- Oh, I mean, commercial real estate, I think is a story that's still unfolding.

Most people would have thought that in the context of work from home that especially office and even, you know, retail would just fall off the table and that hasn't yet happened in the way that you might've guessed.

Now, part of it is that there are segments, industrial is still white hot, you know, multi-family has come back strong and rents particularly in our region, you know, quite strong as opposed to places like, you know, New York or DC.

But I think downtown office space in particular, the story is still gonna be told, the rent, the leases are very long.

There's still uncertainty about how people are gonna work.

And I think in that context, you've not seen, you know, the weakness in that market that you might have expected.

Yeah, vacancies are creeping up and we'll just see where it happens.

And I expected to know a lot more, and this may be a bigger story, I expected to know a lot more in the first half of this year but I think Omicron has messed things up just one more time.

And so it'll just take a while to see what normality looks like on the other side of it.

- Yeah, is there any surprise with the Omicron variant is how it's affected either good or bad for you?

Have you looked at it to say, well, you know, it's more acute maybe in some ways, but you feel like there's a lot and I don't wanna put words in your mouth, but a lot of fatigue around public health.

- Well, the human side of this is just a severe exhaustion and weariness because all of us sort of hope that this thing was gonna be over when the vaccines rolled out and then the Delta thing came, but boy, maybe we've got that behind us.

And so the notion that there's one more virus and perhaps even, you know, others behind it, I think we're all just exhausted, I am, on viruses in general.

The second thing, I think it's just a shock value.

If you look at the seven day average case loads, you know, we thought the winter of 2021 was bad enough, but the numbers have been truly astounding.

three, four, five times the numbers we saw at the peak last January.

On the reassuring side obviously, it's not leading to the same kind of a hospitalization and death situation.

So there is a potential that this thing starts to move toward endemic as opposed to pandemic.

And I will say, that's what I see on the demand side.

Business travel of course, is being curtailed.

You know, conference catering is being curtailed but things that are very specific to in-person work, I think you definitely see the impact there but I don't think you see it in the rest of the demand situation, at least the numbers that I'm tracking.

Now, what you do see it, and this is where, I mean, in terms of, it'll delay, getting back to normal, is on the supply side.

And I think it is probably fair to say that unless we get a variant that puts a lot of us back in the hospital, COVID has become a supply side issue, it's no longer a demand side issue.

We're not shutting the economies down with the exception of those sectors I'm talking about.

But it is hitting the supply side.

We had all the demand we wanted over Christmas for airline travel, we just didn't have enough airline crews, right?

That's a good example.

I'm definitely seeing that in terms of shortages.

I was talking to a meat processor yesterday who's was having trouble getting staffing.

I mean, so it's gonna hit the supply side and that means it's gonna delay the workforces return to full employment.

And it's gonna unfortunately probably create pressure on prices.

- Any idea when business travel will approach a rebound?

- Boy, I mean, you have to make an assumption on variants first.

I will note that if you go back even six months ago, you know, when Delta started to surge, people pretty quickly canceled their October plans.

What I've noticed at this point is, and this will be aired February 4th so we'll see if it's any different by the time it's aired.

People are canceling two weeks out but they're not canceling six weeks out.

So I think even the business cancellation window, people wanna get to the other side of it and wanna expose that.

I'm hopeful and expect that, you know, in the spring, especially the ability to do stuff outside, you're gonna see this behind us.

But I think the window is short but you're still saying it hit the business behaviors.

- One of the bright spots around policy, at least spending policy is the infrastructure bill.

It's something short of $2 trillion but it's large.

When do we start to see the benefit of those dollars?

Where does it start to be deployed?

And how do you kind of look at that?

- Well, it's about a trillion.

It's got a real focus on broadband that is I think going to be deployed relatively quickly.

And most of the communities I talked to are getting organized as quickly as they can to get that deployed in the right place.

There's a bunch of other stuff that's roads and bridges and ports and the like.

And that, you know, you've gotta take time to build that.

These things are not as shovel-ready as you might have hoped.

The thing I worry the most about though, as I suggested earlier, is infrastructure workers.

Do we have enough people to do the work?

And what kind of pressure are we gonna have on what's already a white hot infrastructure market.

And so it doesn't stress me too much if the infrastructure money comes out 18 to 24 months from now because if you gave me another road to build, I don't know where you'd find the people to build it today.

And so I think again, we've got to get the economy back.

I'm really hopeful.

In a a negative trend that we've seen is enrollment in these community college degree programs.

Enrollment community colleges is down this year.

It was down last year.

Probably part of that is that wages are up for entry-level jobs and so people faced with the choice between getting a credential and taking a job or actually finding the jobs more attractive.

But regardless, you know, those are the places that produce a lot of these infrastructure workers.

And we've just gotta find a way to get more people in and through these programs and licensed into these jobs 'cause I think there will be the demand for that infrastructure but we're gonna have a supply shortage.

- Well, so where do the workers come from?

I mean, quintessentially where do you see them coming from?

- Well, we have an economy where even February 2020, 63% of people were working 80% little less of prime age workers were working.

We have workers on the sidelines throughout the economy.

You know, in the smaller towns and our district, lots of them have almost half the population not in the workforce.

And so bringing people into the workforce which is a combination of attractive jobs, getting people to training, thinking hard about search, thinking hard about breaking down some of the barriers that exist today, whether it be licensing issues or drug tests or other background checks.

Getting folks in the economy, I think is a real imperative.

I gave a speech on that in Greenville a couple of months ago.

I think that's actually a really big deal for us.

That's what we've got to work on if we're gonna get enough people into these jobs so that we can get the work done.

- But we can't blame Federal relief money for unemployment, lack of unemployment participation anymore, can we?

We're pretty well past that.

Do you feel that?

- Well, I certainly would have been among the people last August to expect it when the enhanced unemployment insurance expired that you see a surge of people in the workplace.

We just haven't seen that.

Now, why that is, again, I believe that part of it is COVID and health concerns still.

I believe part of it is care concerns, whether that be elder care or childcare or frankly, grandkids taking care of the grand...

I mean, grandparents take care of the grandkids.

You hear a lot of that.

Uncertainty of school, so I think that's part of it.

I do think there's a piece to it which is even the less fortunate among us still have more money in their pocket today than they did two years ago.

JP Morgan says liquid savings are up 70% even for that segment.

Again, that's a $1000, not a huge amount of money.

And so some of it we'll have to work down.

Now, some of that probably came from transfer payments but some of that also came because nobody's spending as much during COVID as they did before.

And so people save money in ways they hadn't before.

- If you've been watching this dialogue, it is important to remember and to note, program note, it is being taped here on January 14th but actually probably you're seeing it now for the first time on February 4th.

But again, our thanks to President Barkin, Richmond Federal Reserve President who is now starting, I think your fifth year.

Is that right?

- That's correct, goes fast.

- Well, congratulations, sir.

We're glad to have you on the job.

And again, nice to see you and best of luck going forward.

Stay healthy.

- Thanks Chris, you too.

- Thank you for joining us, until next week.

I'm Chris William.

If you have any questions or comments, like to watch or rebroadcast, go to carolinabusinessreview.org.

Until next week, happy weekend.

Stay warm.

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