Chapter 1: What is the main topic discussed in this episode?
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News. 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.
Yeah.
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 jobless 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 unemployment side. We'll get some important data in a couple minutes here on the inflation side, and I think we'll get there when we get there.
Well, the majority... Majorities 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. Then 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 and other places, 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.
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Chapter 2: What are the current challenges in employment and inflation?
And so we're seeing a lot of trading down, 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 don't buy something else on the other side. And that's your classic relative price tradeoff.
And that may mean that you won't see as much broad-based inflationary impact as you'd see price increases on particular items. We'll see.
And yet you get PCE in an hour and basically you've already calculated the numbers. Inflation is 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, 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?
My overall thesis, though, is that while it's not 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 productivity, 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 redistribution. revocation of temporary status. Also, our generation, Mike, which is leaving the workforce.
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Chapter 3: How does the recent economic data impact Fed's rate decisions?
I mean, you're seeing a million three more people over 65 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.
Well, at least you and I are still employed, as of today. Well, we'll see how this interview goes from here. 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?
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. 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. 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 going to set you back. And so what I say about businesses in general is not true of businesses in every sector.
And so there are 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 how markets ought to rise or not rise. I mean, we're very much focused on trying to land the plane here in balancing inflation and 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 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 2026?
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Chapter 4: What factors are influencing inflation forecasts right now?
That's what we do as a discipline is 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. And we're looking forward to doing that. On the neutral rate, 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 200 basis points. And so you could say it's three, which is around the SEP median. You could say it's three and a half or two and a half. But if you add a 200 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 the model we've got in 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 a 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 Lori 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. Do 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 and political 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.
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Chapter 5: How does consumer behavior affect inflation and pricing?
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 is 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 in spikes in 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 variables is going to play out.
And so I feel like very adaptive is the way to think about it, and that's part of why I'm not being prescriptive into, well, it's this many 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.
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