Joining me now is Tom Barkin. He's president of the Federal Reserve Bank of Richmond and a member of the Federal Open Market Committee, which makes US monetary policy. Tom, welcome back.
No, I appreciate being with you on Small Towns last year, and we'll have a good conversation.
You were here last year, and you're back for more. I think of you as a very dedicated public servant.
I'm in. Let's keep doing this.
Okay, very good. So, we have been at the Jackson Hole Economic Policy Symposium all day. The kickoff event was a much-anticipated speech by Fed Chair Kevin Warsh. And I wanted to get your thoughts on the speech, how you interpreted it, what you thought its impact was, and the like.
This is a long-standing tradition, and I think there are only two years in the last 20 or 30 where a Fed chair hasn't opened by giving a speech. A piece of inside information: we don't get to see the speech beforehand. So this is the one time all year where the chair stands up and he's not representing the committee necessarily. He's representing his views, and I think as a result of that, chairs take that very seriously. They put a lot of thought into it. I thought Kevin was very authentic. He outlined the principles that he believes in. Those felt to me like the principles he articulates to me that he believes in.
And you've known him for a while.
Yeah, I knew him when I was on the board of the Atlanta Fed. He was a governor, and I got to know him then, and I've seen him here and there since. But that I think he believes that he talked about—I'd also say he was very accurate. He talked about the economy. He made a few points: labor markets in good shape, demand is very vibrant, artificial intelligence is clearly a huge influencer of that, and inflation's too high. So, you know, I didn't see the speech beforehand, but I was very happy as I heard it that he represented, I think, an authentic view on where he is and a set of policy points that we can work with.
Right, okay. So you feel reassured—maybe you were already reassured, but you feel reassured hearing that speech.
Well, there's always uncertainty, and you know, if the chair stands up and says something you don't agree with, you have to work against that. So I didn't hear any of that today, but that's the kind of thing that can happen. Yeah.
And so he did make the point, if I remember correctly: unemployment's low, labor market looks strong. You have to recognize that the supply side of the labor market is not growing nearly as rapidly as it was just a couple years ago because of a slowdown in immigration. He emphasized maybe more than once that inflation continues to run too high. He pointed to the 65 months in a row of inflation above target, but he briefly reviewed recent inflation numbers and said they're somewhat better than expected, but still we have a lot of work to do. So he did, I think, establish or reestablish his concern about inflation being too high and made it clear that that's the priority. Is that kind of—
Yeah, I'd agree with your synthesis. I would say in my mind the labor market's more solid than strong. Unemployment rate is very low, and that's a good thing. But when you talk to businesses—and you know, I spend each and every day out there in the markets talking to businesses—you're not hearing a lot of hiring. You're not hearing a lot of wage pressure. And of course, we all know college seniors are having trouble getting jobs and those sorts of things. And so, you know, it's certainly not a vibrant, frothy jobs market. I think of 2018 and 2019 when I started; that was a very different jobs market than the one we're in today. And your point is very fair: the reason it doesn't show up in the unemployment rate is that demographics are having a lot of people retiring, immigration's way down, and so the supply of labor has moderated at the same level as the demand for labor has moderated.
That's right. And I'll add one other point that's often underappreciated: layoff rates are extraordinarily low.
I mean, if you look at the new claims for unemployment insurance benefits, they're the lowest they've been as a percentage of the labor force back since the series is available in the '60s. But even if you look at other type measures based on the household survey and so on, the rate at which people are flowing from employment to unemployment by reason of job loss is also quite low. So that's the favorable side. The unfavorable side, as you mentioned, hiring's sluggish.
And I'll say quits are very low, too. Turnover is low. People are nervous about the market, they don't quit. But if people don't quit, you don't have to hire. So those things, there's this very interesting multi-layered thing going on in the jobs market. Because for years people have been predicting recessions; that recession hasn't happened. But if you're a business worried about recession, you might not get out over your skis in terms of hiring. If you're an individual worried about recession, you might not quit and take another job. The net of those two is you don't have that many layoffs because you don't have that many excess people, or you don't have that many hires because you don't have that many vacancies. I'll also say earnings are very strong, and people will do layoffs when earnings are good, but they don't really feel pushed to do layoffs when earnings are good. And so, if that were to turn south, you might have a different story, but it hasn't obviously.
Okay. So, a little bit of a difficult labor market for new entrants to the labor market.
But otherwise, people are anxious perhaps, but no major layoff spikes, and despite all the bad news you hear about—
Little announcements here and there, it hasn't really materialized. In fact, the hard data say just the opposite. That's the labor market situation.
And then so you were saying inflation's too high, and so that's absolutely true. Yes.
Okay. So that's kind of the near-term outlook. He had a funny line about, "I'm going to lay out—" oh, we'll get it exactly right: you can call it a road map, you can call it a trail or something like that, but please don't call it forward guidance.
So he was giving his little pitch. So he disavowed forward guidance. Again, no surprise there. He explained a little bit why it may bind the Fed to decisions that will turn out not to look so good after the fact. I think he gave the example of the situation in '22, if I remember right, where forward guidance maybe led the Fed to be too slow to recognize and to react to the inflation spike that we had. So he made his case briefly against forward guidance. That was not a surprise.
I was a little more surprised by this, but I want to see if you were: he did make an explicit point to say also no mechanical reaction function. I get that, but he could have omitted that, and he didn't add after that—he did not say, "but we can still use a Taylor rule or something like that as a guide to assess policy," which is sometimes what you've heard from Fed officials in recent years. So he didn't say that. So he's pretty clear, reaction functions are going to be in the background. Maybe the economic staff can worry about that, but it's not going to be in the foreground of his thinking. That's how I interpreted what he said. And is that how you saw it?
What I've heard him say over and over again and what I believe he truly wants to accomplish is to go into a meeting and have a debate and come out aligned on an answer. You dislike forward guidance, I suspect in part because that takes away the ability to have the debate. And I wondered as I listened to those points on the reaction function if you make it too clear, then are you taking away from debate? I read his 2014 Bank of England—he was an outside reviewer of the Bank of England—and it talked about how he saw the Bank of England communication policy. And the Bank of England, they spend all day in a non-transcripted, free-flowing conversation about the economy before they go to day two and land on policy. And I've wondered whether that's not the kind of thing our communications task force may come back with.
I see. That's interesting, because I don't think that's the way the FOMC has operated under Powell—or you can correct me if I'm wrong—or Yellen or Bernanke. There's a lot of bilateral conversations in advance.
The way it works today is there's multiple rounds of trying to craft the statement in advance of the meeting.
And policymakers all have a chance to talk to the chair, and there's a reasonable amount of back-and-forth before the meeting as we try to land on a statement that'll get support from the committee. The meeting in the committee is relatively formal. We talk about economic conditions, we talk about policy. Most everybody prepares their statements in advance and, in varying amounts of free form, reads their statements. And so that's a much more scripted meeting. And again, from what Kevin said to Congress and otherwise, I sort of sense he wants a more free-flowing discussion. And so I think if you sort of said we're going to make policy by a rule, then I don't know what you'd be debating in the meeting other than someone might say, "r-star has moved, and I've got a different version." It's a much more broad-based conversation, I would like to think.
That's an interesting take, somewhat different. I interpreted his remarks about the reaction function to mainly be speaking to the public, but you're saying he's also kind of speaking to the FOMC members about—this is what I'm hearing from you, if I'm getting it right—that if you're too formulaic in your approach to monetary policy, then it undercuts the ability to have this free-flowing discussion in the FOMC meeting.
Yeah, I think he was talking to the public, to be clear. I don't think he was talking to us today. But as you ask about what are good reasons not to bind yourself to a rule, that would be one that's consistent with the conversations that he's had publicly and what I sense to be where that communications task force is likely to go.
So it's going to be more fun to be on the FOMC now. You go in there, you don't really know who's going to say what maybe, and what exactly will come out of the meeting. Is that—
Well, you always have to be wary of thinking these meetings are going to be more fun. I don't know that I would go—
Okay. Well, I haven't been in one of them, so that was my impression.
But I read a transcript gosh back in—there was a key meeting in, I think, '82 or '83 where in the face of high unemployment but also high inflation, the committee chose to raise rates. And I went back just for fun to read that transcript, you know, just to inspire me. You never know when you might need to do that. And I have to say, if you read that transcript, which was a much more free-flowing meeting, they spent two hours, two and a half hours debating what word they should use to describe the money supply, because they were making choices in that era largely based on the money supply. And I think that was a pretty mind-numbing part of the meeting. So, you know, unscripted may be good, but we may have collateral issues we'll have to work with.
I see. But this contrast that you drew between the way the Bank of England handles these meetings and the way the Fed has, at least in recent years, been handling these, that's a stark contrast.
Yeah, I think it would be an interesting—I'm sure we'll debate this. Mervyn King is on the task force, so I'm sure he'll have a view that will bring this in. So we'll have a good debate about it. I think it's an interesting way to go.
Yeah, interesting. And so what else did you take from Kevin's speech?
