There could be a backlash on data centers. And maybe that would be the perfect thing to do economically because we won't overbuild the way we would have otherwise. Well, and now we're going to underbuild. So yes, it could have a big impact, but I do not have—I need to have forecast skills to help me figure out how big this thing's going to be, because you're trying to meet a very significant moving target.
Have you tried asking ChatGPT what it thinks? Just type it in, just ask it.
I've also asked it to try to write a speech for me, and I didn't think it did a very good job.
Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
Joe, we're still in Jackson Hole.
That's right. Plenty to talk about. We just got the speech from Fed Chair Kevin Warsh, which I think most people would describe as hawkish, although maybe there's kind of a gap in between the hawk and the -ish part.
Sure. And there's still plenty of questions about the direction of the US economy and monetary policy in general. So we should talk a little bit more about it.
We should. And beyond that, you know, there's many theoretical questions out there. What is the neutral rate of interest? What is the role of AI on productivity? And all of that is very interesting. Where does the term premium end? But also it'd be interesting to know what the central bankers are hearing about actual businesses right now and like what's going on on the ground.
On the ground color. Okay. And there is one man that we go to for on the ground color.
We have the perfect guest. Of course, we're going to be speaking with Richmond Fed President Tom Barkin. So Tom, thank you so much for coming back on Odd Lots.
Great to be back with you. I think it's my third year in a row here in Jackson Hole.
Yeah, no, and they let you outside of the hotel room. We get the Tetons in the back, so.
The production values have gone up, I will say. Okay, so let's just start very simply: Warsh's speech. What'd you think?
I mean, he does a great job. He's a great speaker. And I thought it was a very authentic speech. I mean, Kevin laid out, I think, how he sees the world. He laid out how he sees the economy. The folks I've talked to, you know, appreciate the clarity and the thing. And I personally thought it had a very accurate sense of the economy. So I was very much aligned with what he said, and I thought he said it well.
So he said everything except—so he said, okay, inflation seems to be going in the wrong direction right now. He described policy as not restrictive. So then you fill in the blanks and it's like, okay, that means rate hikes. But he didn't quite say that. Just for you, in terms of as you see things, do you agree about inflation and the stance of policy, but then more importantly, then what do we do about it?
Yeah. So, the economy's solid. I think he said that, and you can definitely see that in the GDP numbers and the consumer spending numbers. I mean, it's been crazy this year that gas prices went up and consumer spending accelerated. It's been crazy that you have all this uncertainty and artificial intelligence spending has led business investment, you know, almost double versus its historic thing. So there's a lot of momentum in the economy. Jobs market seems to have stabilized, unemployment rate's low. So all that's good.
And I'm not saying inflation is just headed in the wrong direction; it's just not in the right place. And I think that's not in the right place. I also would say the job market's good, but it's not frothy. Yeah, I mean, the slow hire, low fire thing continues. And so that's where the policy thing we'll figure out.
The number one thing people have asked me after his speech is, "Well, I guess that makes—you know, that tells you something for September." And I said, "Well, I listened to his speech and I'm pretty sure he doesn't like forward guidance, right? So I don't think you should take any forward guidance from a speech from a guy who doesn't give forward guidance." And I think people can't help the problem. No, I know, but I mean, I think you can talk about the economy in a very good way, and then you can talk about forecasts. If you choose not to do forward guidance, you don't do forward guidance.
I want to talk more about forward guidance. But since you mentioned the resilience of the economy, do you have a working theory for what's going on here? Because I think to your point earlier, it surprised a lot of people that even with prices still pretty high, gas going up, all the economic uncertainty, consumers keep spending.
They do keep spending. And I would compare it to coming out of the Great Recession. In the Great Recession, you had people who lost their jobs, lost their house, lost their car, savings destroyed, need to be rebuilt for retirement. We had 5, 6, 7 years of secular stagnation where people weren't spending the way you thought they would.
I compare it to COVID. We thought for two months it was going to be terrible, but then coming out of it, people had money in their pockets. You had stimulus, you had spending money you hadn't spent. You had equity values up, you had home values up. And I think you had a mindset that just says, "I'm bound and determined to spend." And so we all know the wealthy people are spending because they have more wealth, but even those with less wealth, what I hear is a very creative consumer figuring out ways to find money, to spend money, to borrow from the future.
You can see the finding money in the growth of private label, the move to Walmart and dollar stores if you look at their results. But people aren't carrying insurance. There's a story in the Journal a couple of weeks ago about more people living at home. You and I think more people living at home, "Oh my god, my kids are coming back." I think, "Wait a second, those are people not paying rent and they're using that money to spend on something else."
I've talked to auto lenders who talk about people being 60 days delinquent, not 120 days delinquent because they need to find the money, but they don't want to lose the car. I've talked to gas providers who say people aren't paying the gas bill during the summer because no one's going to have a problem with gas in the summer; it's the winter that matters. So people are finding ways to effectively borrow from the future. Savings rate's down, and I think that's what's keeping the spending going. And underneath it all is just this positive energy to keep spending. And I really do think as long as the markets are healthy and people have jobs, they're going to keep finding a way to spend.
That was a very good sort of summary of one of the engines of the economy that's clearly continuing to fire. We traveled with you—was that 2023 or 2024 that we were in Mount Airy?
'24. And at that point, one of the things—we were talking about rural housing issues, rural childcare issues, but also, and one of the things that came up was the scarcity of skilled trades. And now I have to imagine it's much worse because, you know, if you're a skilled electrician, you probably are working, at least in theory, the AI boom, etc. We talked to Austan Goolsbee maybe two days ago, and he's like, "Yes, we hear a lot of people complaining about the scarcity of skilled trades and the AI buildout. People are always complaining." He wasn't sure how much is actually related to data center and AI construction. What's your read on the scarcity of parts, materials, and labor for general things, and the degree to which AI investment is crowding out and making life more difficult for other types of industry?
Yeah. So, it's been a monumental construction investment cycle. $700 billion announced in one week, I think at the beginning of February alone. And for sure, if you're trying to find switchgears or transformers or electricians, they are very hot and in very short supply. So there's no doubt in my mind that there are constraints being put on it.
I think the overall construction cycle, though, it's fascinating because office buildings aren't being built, multifamily starts are way down. Industrial is starting to come back, home building's okay, not great. And so I do think there's been a big movement in terms of construction from one sector of the construction market into another sector of the construction market.
Now, how much of that is crowding out I think is a good question, because when I talk to people in, let's say, multifamily construction, they'll tell me you can't pencil it out, and they want to talk about interest rates. And of course, I say, "Well, is it really interest rates, because we had the same interest rates in '04 and '05 and you were building lots of buildings?" And then they'll acknowledge that construction costs are up, and labor costs are up, and they have to put more equity into projects, and all that kind of stuff. And so it's more than that. But you could argue that all this data center construction is making it more expensive to do this other construction, which means they're not doing this other construction because it's more expensive. So there's a chicken-and-egg question in there.
Just within your district, I know you travel around and, as we said, you like to talk to people on the ground in actual businesses. But what are the most notable impacts of AI that you're seeing so far, whether it's on something like the labor market in the low-hire, low-fire environment, or prices?
Well, so it's interesting. I mean, the number one impact is a political impact. And what I mean by that is every Chamber of Commerce meeting I do, every town hall I do, I'm getting questions about jobs and water and data centers and all the rest of it. It's really quite striking. And you can see when you travel the issues on people's minds by the questions they ask.
In terms of the economy itself, I don't think it's having this massive productivity impact quite yet outside of just a couple areas where there really is a structure where you can substitute an agent, like call centers, programming. I mean, you see it there. There's some heavy documentation, compliance documents. But by and large, the productivity boom we're seeing, which is significant, I think has really been driven by '22 when you had people short workers, and so they invested in automation, they invested in new staffing models and different operating processes, and they're reaping the benefits of those today.
People are enthusiastic owners; executives are enthusiastic about AI, workers somewhat less. But it's still being very much used as an extra added "get my job done better, get my job done faster" kind of thing.
The one place you said there was on the hiring side, because this may not be true for Bloomberg, but everywhere else in the economy, people are saying, "You know, I don't know what the future looks like. Maybe I don't need to hire as much. I wonder whether I can do that job. And so why don't you leverage and see if you can't fill the job using AI first, and then we'll hire later?" That's happening at some scale. And so I do think that's the place where it's most relevant.
One thing that was clearly working, I guess, in the Fed's favor when it comes to the dual mandate is the housing market is pretty—it's not very hot. Most of the numbers there are going in the right direction, so to speak, from a get-inflation-back-to-target perspective. But how confident are you that that will persist, especially if we've had softness in construction? Do you have any anxiety that eventually that turns into housing tightness again?
Oh, I think that's highly likely. At some point, you've got a whole generation of people who really want houses and the price isn't quite right for them. At some point, they'll have their second kid and they need a bigger house, and so the demand will come. And then if you don't have the housing inventory, whether it's rental or single-family, then the prices will go back up.
I will say, we sort of got in the mode a few years ago that I think we should back off of, of trying to take the inflation data and parse it and take this part out of it and this part of it. It's very tempting to do that—to torture it and get the answer you want. And I was getting for a while, when market rent numbers were coming down faster than the CPI rent numbers, I was getting emails from real estate developers saying, "You've got your numbers wrong and the rents are coming down faster." Well, I'm not getting those emails anymore. They're not saying, "Hey, let's take the Apple phone—your Apple phone just got more expensive." So you don't want to over-parse it.
You want to say overall there's an amount of money in the system, there's an amount of goods people are trying to buy with that money. Maybe prices of housing come down, but maybe prices of something go up, and you're looking at inflation as a total basket. That's how I like to think about it.
Yeah, so Warsh was talking about this yesterday. He was talking about looking at the breadth of inflation and things like that. And I'm curious, do you still see—he was also talking about a lot of the one-off shocks that we've seen, so the Iraq war and the impact on gas prices and things like that. Is the overall environment just more inflationary in general when we see these one-off shocks that just seem to keep coming? It's like this month, it's this one thing, and okay, maybe it'll fade away into the background after a while, but then the next month there's another thing on the way.
It seems like it. And I think the question is, is normal today or was normal ten years ago? And I think normal may be a lot more like today than it was ten years ago. If you think about the environment ten years ago—fracking and what that did to help bring energy prices down, and demographics which meant you had more workers and kept wage costs under control, and e-commerce which was bringing prices down for stuff you bought online, and there were just a bunch of globalization access, all these factors which were, I think, bringing inflation down—I don't think it's ridiculous to imagine that ten years later you might have a bunch of factors that would be bringing inflation up.
Now, the inflation we realize in time depends on what we do about it. So just because—I like to use the analogy of sailing. You just sail differently if you got the wind behind you than if you're sailing into the wind. You can still get there; you just have to tighten your sheet. And I think that's the kind of risk we've got. If you're in a world with an ever-continuing set of inflationary shocks, you just have to lean against that wind.
So obviously, one of the things that came up in the speech—and again, we know that Chairman Warsh is not a fan of forward guidance. There's going to be these task forces, etc., that may revisit some of the Fed's approaches to communications, etc. Would you be on board with, say, you know what, we don't need dates anymore, we don't need to have press conferences? Like for most of the Fed's history, the chair didn't have a press conference. In your mind, should all of these things be on the table? Should you be talking to us right now?
So somebody said the test of a great mind is being able to hold two opposable thoughts at the same time. So I hold the following two thoughts to be very clear. One is, if we're relatively transparent about how we think about things, that helps build credibility with the public, it helps build trust in the institution, and it helps markets do some of the work for you. That's the famous Bernanke theory.
I also 100% agree with Chairman Warsh when he says, you know, sometimes if you give too much forward guidance, you get stuck in it and you end up having to make a suboptimal decision because you've misguided. And I think it's fair to say that's part of the 2021, 2022 story, which is we had very strong forward guidance in place, and it was very hard to get your way out of it. So I can hold both those thoughts at the same time. And I hope to keep coming and talking to you as long as you'll have me.
What about like dot plots, like these specific techniques?
So we'll have to debate the techniques, and I'm sure we will. My view on the SEP is I really like doing the SEP. I mean, I like negotiating, arguing, debating with my team my policy bias next to my economy bias. And it often happens that I've kind of got a little out of whack. The staff says to me that, but I'm not really thinking about it in the right way, and we have this debate. I feel it really sharpens my thinking. So regardless of whether we release it or not, I plan to keep doing it because having your own forecast and working against the forecasts is a pretty healthy thing.
Now, should we release it? The one thing I don't like about the SEP is I think the dot plot itself is a picture that overwhelms the story. And I've said this in other forums, but if what comes out is I go do a Chamber of Commerce in Greensboro and somebody says to me, "Well, I see the Fed promised two more rate cuts this year," then that's not good communication because that's not what we've done. We've done a set of forecasts independently. And so good communication to me has to communicate well. And if what's happening is that picture is swamping the narrative, then we're going to have to think differently about the picture.
So I take the point that there's a risk with forward guidance that the Fed could get boxed into a certain decision in a suboptimal way. But that said, and I also take the point that there's a distinction between forward guidance and the reaction function in general. But all of that said, at some point, if inflation is above target, you would think the Fed needs to act. And Warsh kind of insinuated this in his speech. He talked about, well, inflation's been above target for what was it, 65 months or something, and he said that is squarely on the Fed. When you hear something like that—I mean, you were in the room. You were at the Fed for part or all of the past 65 months. What do you think? What's your reaction?
Well, I'm definitely 100% insistent on getting inflation under control, and I think it's fair to hold that mirror against what we're doing and ask ourselves the question of whether we're doing it the right way.
I think there are two ways you can look at where we are today. You can take a 65-month view, or you can take—I'll get the month right—a 47-month view followed by an 18-month view. And if you do the second, which I'm not arguing for, I'm just saying it's a perfectly defensible way to do it, is you say inflation happened, maybe we were a little slow, we raised rates, inflation came down. If you go to March of 2025, you've got 2.3, 2.4% inflation and everything seems to be headed in the right direction. The economy's moving, the labor market is a little weak, the plane is going to land. And then, of course, you've had this series of external shocks, whether it be AI or tariffs or oil price increases, and that's taken inflation right back up. But you could argue in that, "And then we'll bring it down." That is an argument. It's a colorable argument, and it's not a 65-month, it's a 47- and 18-month argument.
On the other hand, you say, "Don't give me your excuses. It's been 65 months and it's been over, and maybe rates aren't that restrictive and maybe you have to think about it." And that's the argument I'm sure we're going to have.
What are manufacturers in your district saying about tariffs these days? It feels like behind AI and the oil shock, we don't even talk about trade.
Oh, it's a lot quieter than it was now. But it depends what sector you have. If you're a steel or aluminum manufacturer, that's great—a price umbrella that's helped your industry. If you're somebody moving operations into the country, there's a real argument there.
The people who are the most unhappy about it are the people who it affects the most, and the ones who are most poignant, if I could put it that way, are the foreign manufacturers who have assembly operations—many of them are in South and North Carolina. And they said, "No, we've actually moved manufacturing to the US." But what that actually means is they create their components in Europe and they ship them to the US, and then they assemble them. They're still getting tariffs. And so you have those sorts of stories out there.
Quietly, what's happened on the tariff side is the numbers went up, the collections were never as big as the numbers were, and then the Supreme Court ruled and they've put through all these refunds. So one of the reasons you're not hearing a lot about it is for the last 3 or 4 months, people have been collecting refunds as opposed to paying for tariffs. And when you collect, you're not talking about it quite as much when it's working to your advantage.
Are the refunds stimulative in your mind? It's a decent chunk of money.
They're very positive for earnings. If you read through the earnings reports of the people who've gotten the refunds, you hear they're going to reinvest it in the customer. You hear a lot of that reinvestment in the customer, occasionally as price, but I think it's a lot more marketing, store refits, staffing levels.
So positive earnings are stimulative. Companies are less likely to do layoffs, more likely to hire, more likely to invest. So it is stimulative. But is it coming through the price? I think in very targeted ways, but not in a massive, system-wide way.
Well, this was also going to be my next question, because there was a debate about the tariff pass-through into price. And I think some people would have said when the tariffs were first announced, "Well, consumers are stretched. Companies aren't going to be able to pass them on." But now we've seen consumer spending stay resilient, as we discussed earlier. How are you thinking about that pass-through ability now?
So the B2B companies I talk to, to a person, they're convinced they're passing it through. Tariff costs have come in, I've had to pass it through, I know they don't like it on the other side, but what am I going to do? We have to do it. And they tell me they've been pretty successful at passing it through.
If you're a B2C company back in April of '25, you would have said, "Oh yeah, I've got to pass it through." A lot of them had trouble passing it through—easier if you serve wealthy customers, harder if you serve less wealthy customers. But those people who sell into the major big box retailers, they tell me they're having a devil of a time trying to pass it through. And the mindset of those retailers is, "I need to find some price to give to my customers."
So I think the consumer pushback is very real. It's most real B2C, it's most real low-to-moderate income B2C. And then you might say, "You just told me earnings were good. How's that happening?" And that's where the productivity stuff comes in. There's been very little wage pressure, and people are really driving productivity again through the set of things I think that they launched 3 or 4 years ago.
Those big box retailers, they're truly our strongest soldiers in the fight against inflation, holding those prices, holding the line on prices.
On behalf of the customer. Well, that's another—I was talking about all the disinflationary stuff in the 2010s: the rise of the big box retailers, the rise of private label brands. All those things help keep prices under control and help keep spending.
Okay, you're saying we didn't know how good we had it.
