Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.
Joe, we are still at Jackson Hole.
Yes. By the time this episode comes out, the dust will have settled over the entire event and we will have gotten well, we already had the speech from Fed Chair Jerome Powell, right? And this afternoon, as we're recording, we're seeing markets surging. Everyone, it seems, has interpreted this as pretty dovish.
Yeah, that's right. Ann Wong at Bloomberg had an interesting piece. Well, maybe it wasn't as dovish as people think, but it felt dovish in the context of a recent chat with Austan Goolsbee. Recently he was concerned about he's starting to look at that inflation data a little bit more. Felt dovish in the context of our recent episode with Kansas City Fed President Jeffrey Schmid. He too was talking about how things are maybe still looking a little warm on you could be talking about hikes. If you look at the Taylor rule, you know, you could argue maybe rates should be a little higher. Anyway, I think we should continue on our survey of as many Fed presidents as we can.
All right. Well, we do have the perfect guest. On that note, a friend of the pod, Richmond Fed President Tom Barkin. Welcome back. It's good to see you.
Yeah, good to see you guys, too.
Thanks so much for doing this, taking time out of your hiking and conferencing schedule. So, we appreciate it. Why don't we just start with the obvious question which is I guess you talked earlier this week that the balance between employment risks and inflation risks is really unclear at the moment. Powell seemed to err on the side of the labor market, right? He kind of chose to prioritize that. Do you think that's the right move?
Well, as you said, I've been saying I'm confused about everything. I'm confused about the labor market and the inflation side. And I think there's lots of people who come up with different views of how to weigh the risks. Here's the interesting thing. We've been hearing from businesses for a year and a half that they haven't been hiring. We've been seeing in the number that they haven't been hiring. They also haven't been laying people off. And when we get into the jobs numbers that kept coming in at 130,000 a month or 120,000 a month, that seemed strange, but it was good news. I mean, there's nothing wrong with a lot of jobs. And so what we saw last month was a different jobs report with a jobs revision that now sort of says, 'Hey, we're growing at 35,000 jobs a month.' That actually makes a little more intuitive sense to me given what I'm hearing in the marketplace. If you're not hiring, then where are the new hires coming from? And by the way, we'll get a revision QCW in September that probably will take those numbers down again. And so if you're dealing with a 130,000 job market, that's a very different level of confidence than if you're dealing with a 35,000 or even maybe even a zero job growth market. And I think that's where the concern comes from. What holds you back from being overly concerned is the unemployment rate, which still is at 4.2%. Perfectly really good unemployment rate, you know, at any time in any cycle. And so, how much do you feel in the jobs growth? How much do you feel in the unemployment rate? The gap between the two obviously is driven by we're not having net migration into the country the way that we used to. You could call that 2 million a year. My generation, the baby boomers, are aging out of the workforce. I'm not aging nor am I out of the workforce, but my generation is. And that's maybe 1.3 million people 65 and older increase out of the workforce over the last 3 years per year. And then, this temporary protected status thing takes some more people out of the workforce. And so it's possible that we're seeing zero job growth and that's going to keep the unemployment rate steady. But, you know, there's nothing wrong with being nervous about that. I think you also have to be nervous on the inflation side. And we weren't at 2% before all the tariff talk. All the tariff stuff's coming in. It's not hitting inflation nearly as much as some people thought, but people are still passing it on. You would have seen Walmart's earnings report yesterday where they talked about it or Home Depot. People are talking about it.
Yeah. Walmart basically said it's coming. It's coming. Now, it doesn't have to be as severe as people like to think, and we can talk about that if you want, but it's coming.
So, I like to say monetary policy is really easy three-quarters of the time. When inflation's high and unemployment's low, raise rates. And when you have the opposite situation, lower rates. And if inflation's low and unemployment's low, you can spend a few more days at Jackson Hole. But if you're going to have risk on the inflation side and risk on the employment side, that's when it gets hard.
Talk to us about your interpretation of Powell's speech because it does seem like actually there is not consensus on how dovish it was. The market surged, but when you heard it or when you read it, I don't know when you saw it, maybe you get it in advance? I'm just curious. So you read it at the same time as we did? Like what was your read on it?
So I think you guys are all incredibly talented and much more talented than I am at interpreting speeches.
He's being very diplomatic. Believe it or not, I actually gave a speech last week and one of the Fed commentators went through my last paragraph and compared it to my last paragraph before and said, 'See, Barkin has changed in these ways.' I'm like, 'Huh, that was really well done.' I was even sophisticated.
So the commentator was correct in a way that you actually yourself thought about. Respect.
So when you guys read these speeches, I mean the commas matter, the sentences matter. That's really our call. For what it's worth, that's our colleagues who are doing the commas. But let's hear your team. And I'm sure Jay's very sophisticated in his team. So I'm sure they're also thinking about that. So I'm not saying people get no accidents. But when I read it and when I heard it, I actually heard it live for the first time, so I didn't read it before it came out. It seemed like a perfectly down-the-middle speech to me. If you would have asked me what the markets would have done, I guess I would have imagined that they'd read it as modestly dovish. It seemed like I read it as more dovish than I heard it. But what do I know? I'm just listening to the speech like everybody else.
Well, I mean, this kind of begs the question, but Powell could easily have just said, you know, we're data dependent and we're going to wait for the next CPI number, the next payrolls number. Instead, he chose to really emphasize the labor side of the dual mandate. Why? Why is that?
I mean, you'd have to ask him when he comes on the show. I know you'll have a lot of questions for him on that.
Tell him he should come on the show.
I will say one thing that's odd about Jackson Hole every year is it's the period where we have the longest break between meetings.
And this time, not only do we have a long break between meetings, but the day after or two days after his press conference, we got these big revisions on the job report. So, I don't know, maybe you could imagine there was an attempt to mark to market from the press conference to here. I don't know. I mean, he knows what he does.
Something that came up in our conversation with Jeff Schmid was this idea that, and I'm curious how this sort of jibes with what you've been hearing from businesses. You know, when we talked to Mary Daly in Alaska a few weeks ago, she said, you know, the revisions made sense to me actually, kind of like what you're saying, because actually this is fitting with the anecdotal commentary that I've been hearing. Intuitively, post Liberation Day, lots of anxiety, uncertainty. Yeah, it makes sense. There'd be a hiring slowdown. However, something that Kansas City Fed President Schmid said was, 'Yes, it fits, but well, the uncertainty is easing now. Tariffs are not as uncertain as they were in the middle of April by any stretch, even though there's new headlines almost every day. There's nowhere near as much uncertainty, and maybe that was the cycle low for the year, that sort of April, May, June, July period.' Does that seem plausible to you based on what you're seeing out there?
Yeah. So, I've been describing that as driving in the fog. And I've been saying that when you're driving in the fog, it's hard to put your foot on the gas because you don't know what's around the next curve. And you don't want to put your foot on the brakes either because you don't know if someone behind you is going to run into you. So, you pull over and put on the hazards. That's an analogy I've been using for a few months. But what I've been saying the last month is I think the fog is lifting. And I do think we've got, you know, what's happening on the immigration side, what's happening on the deregulation side. Different sectors have different points of view on that. We have a tax bill, so you know what that looks like. And people have at least what the boundaries look like on tariffs. Now, I don't think they're ever going to be once set, done, and we'll know the rules forever. I think it's a tool that is going to surface again and again. But I think people sort of know what that is. And so when I'm talking to businesses, it feels like it's shifting now. I'm going to now torture the analogy because they think the road's bumpy, right? And so I still hear a lot of not hiring, not firing. I'm going to be a little cautious with my cost. I'm going to do it through attrition, not through layoffs. I still hear that. I've heard a few stories of leaning into investing, particularly supported by some of the depreciation stuff. I've been waiting for this tax thing to pass, so I have certainly, but I wouldn't say at scale, modest amounts of it. The one place where you might be seeing the sentiment change is on the consumer side. And I've been hearing from the retailers I'm talking to and from the manufacturers I've talked to of a lift in consumer spending starting in end of June into July. If you look at the credit card data, you'll see a big increase in July, which has continued the first two weeks of August. It would make sense that a bunch of consumers who by the way still have jobs, real wages are still up as inflation comes down, and the markets are obviously healthy. Both asset valuations in houses or stock market all very healthy, that they might have taken a step back in the context of all the news in April and May and maybe now they're coming back in. So that's the one place I'm starting to see movement. I'm very attentive. We'll get the PCE next week. Very attentive to what we're seeing or not. You could imagine a temporary air pocket as consumers sort of pulled back worried, and you see this in the consumer sentiment data that inflation was going to hit huge numbers and all of a sudden people were going to be unemployed and they were going to have issues, and now they're not seeing it. It's possible.
Do you think that we're maybe getting a bit of a reacceleration in the economy at this point? Because you look at retail sales, they were very strong as you point out. You look at the Citi Economic Surprise Index that's been ticking up. Some of the regional surveys are starting to improve a little bit. Do you see that reacceleration impetus?
You know, it's possible. Like I said, I sort of see the energy on the consumer side. We'll see how long it lasts. I think you can call a reacceleration when you get there. I definitely am not talking to businesses who are talking about blowing out earnings, and I don't hear one of those kind of accelerations. So, I don't hear frothiness yet, but I am hearing some very positive vibes on the consumer spending side, which I'm pleased to hear.
If inflation is warm and maybe if there's upside risk still to inflation, why could there be more to it than just tariffs? But like, could there be something more going on? And perhaps that consumer strength, pretty large deficit still even with the revenue that's coming in from tariffs. Maybe someone like the spend, I don't know. What do you think is the story on inflation? How much is tariffs and how much is other stuff?
Well, I just think it takes a long time to get inflation back to 2%. If you go back and look at the Volcker years, and of course, he did stuff to the economy that was much more aggressive than what we did. And he had inflation that was much more ingrained and didn't have an inflation target, but he took rates up a lot. Inflation came down a lot, but it didn't get to 2%. It was four.
And it sort of eked its way down from four to three and a half to three to two and a half and then throughout the 80s and 90s.
Exactly. For 20 years until it sort of hit two and started sticking around two.
So I give you that just for perspective. And again, from my experience, I'll tell you why that happens, which is people don't just immediately go back to the old number. You've got some amount of catch-up to do on wages and prices. People who didn't raise it. People's expectations, I think, are very significantly triggered by actual inflation. And so, my old job, we had to raise prices every year, and we sort of thought about it, and a lot of times we raised price based on last year's inflation. And so, it just there's some stickiness to it. And so what we've seen is very encouraging on the inflation numbers. They've gone from seven at their peak down to somewhere in the high twos. Maybe it'll tick up to the three now. And so I think that's one piece of it. It's sticky. It takes a while. And then the second piece of it is I do think you've got this tariff concern in there and that people are passing on costs and then people who don't even have the costs are using this as a cover to pass on cost.
So just real quickly then, if there's all these factors, etc., why is there conversation about cutting rates? Or if there is conversation about cutting rates, how seriously should people take the 2% commitment?
Well, so there's calibration going on. So you've got unemployment that's low, but maybe trending up. You've got inflation that's been coming down and maybe ticked up, but maybe for one-time reasons, and you've got a neutral rate that is by all accounts lower than where we are, but lots of debate about is it just a little bit lower or is it significantly lower? And so I think those three things go together. And people just ask, do you recalibrate to a different number in the context of this, or are we well positioned where we are?
This discussion actually reminds me, what's your story for why inflation did come down in the post-pandemic period? Is it the sort of immaculate disinflation explanation where the supply chain pressures just started dissipating, or did the Fed's actions actually have a kind of sledgehammer effect here?
