Thomas Barkin, president of the Federal Reserve Bank of Richmond, spoke with Yahoo Finance to discuss rising inflation and the future of Fed policy.
Below is a transcript of his appearance on November 15, 2021.
BRIAN CHEUNG: Joining us here in an exclusive interview on Yahoo Finance live is the Federal Reserve Bank of Richmond President Tom Barkin. President Barkin it's great to have you on the show this afternoon. Just wanted to start off with the breaking news that we had gotten about that infrastructure bill with regards to where we are in this economic recovery. Just kind of wondering if the passage of that infrastructure bill moves the needle on where you expect economic growth to go.
TOM BARKIN: Well, most of this bill is going to be spent over multiple years. And so I don't think this is a near term stimulant on the economy. I do think this is going to increase pressure in infrastructure workers. And so I am going to want to see how we're going to keep building out the infrastructure workforce. That's a workforce that's, as you know, already quite tight.
BRIAN CHEUNG: So President Barkin a lot of this is kind of obviously coming at a time where a lot of Americans are worried about inflation. And some people are wondering, well, if this type of fiscal spending is happening, is that going to further inflation. Now when we talk about the prints that we've gotten so far, obviously, that hot CPI print showing the fastest pace on a year-over-year basis since 1990, is what we're seeing right now transitory in your view?
TOM BARKIN: Well, the last CPI report, as you know, was pretty significant and pretty broad. And so we'll see how long this lasts, but I do anticipate the supply chain issues are going to last well into next year. And I'm watching very closely the labor side. There's a lot of pressure right now on jobs as you know. Participation, wages. And that's the kind of thing that makes inflation more longer-term. And so that's really what I'm watching, is the labor market.
BRIAN CHEUNG: And I want to get back onto the labor market in a little bit. But I want to stay on the theme of inflation because it's also weighing on consumer sentiment. We saw that from the University of Michigan's release last week. Do you feel like there's a risk of an unanchoring of inflation expectations from the perspective of the U.S. consumer? Because it's clear that people are talking about this at the dinner table now. They're noticing it at the stores. When you talk to people in your district in Richmond or small businesses, how important is that discussion as you try to think about whether or not there is the risk of an unmooring of inflation expectations?
TOM BARKIN: Well, there's always that risk, but I've taken some comfort out of the combination of what you hear from those consumer surveys that seem to suggest medium to long term inflation is still within most norms. I've taken some comfort from the markets, which seemed to have medium to long term expectations still pretty stable. And I've taken some comfort when I want to talk to businesses. Because even today, as they see higher costs and they're pushing into prices, they're not talking about this being something that's going to last year over year over year, which is really what persistent inflation is.
BRIAN CHEUNG: Well, that's interesting. You bring up businesses and you have experience kind of consulting for businesses as well. Margins right now, are kind of the big driver when it comes to price increases. These are the executives who have the ability to put into place a passing on of cost. If they're facing higher material costs or higher labor costs. So when you talk about the idea of transitory — this obviously appears to be lasting longer than many policymakers thought — do you see what we're seeing in earnings this quarter as supportive of the transitory or supportive of the persistent argument on inflation?
TOM BARKIN: Well, I just don't think what you're seeing this quarter has all that much relevance for what you're going to see a year from now. You have supply chain outages, which means that manufacturers, businesses are more interested in getting availability than they are in squeezing on cost so they're more receptive to price increases. You have consumers that have a lot of money in their pocket, and are free to spend by combination of the vaccine and opening the economy. And so they're probably less willing to walk away for a price increase than otherwise seen. We've got to get to the other side of this before you really know whether these things are persistent or not.
BRIAN CHEUNG: Well, and I guess that kind of gets at the question of whether or not the inflationary pressures that we're seeing right now are coming from demand or coming from supply. And we know the anecdotes about the supply side of things with the bottlenecks and also labor shortages and whatnot. But what do you see on the demand side of things? Because there's a question about whether or not the fiscal stimulus that had been put in place during the depths of the pandemic may have changed the behavior for the propensity of Americans to spend, is that something that you're seeing in the data or things still really noisy and difficult to figure out right now?
TOM BARKIN: Well, there's no doubt in my mind that demand is quite strong today. On the consumer side, the business investment side, on the government spending side, demand is quite strong. And everyone I talked to says that. You still have about two and a half trillion in excess savings in people's pockets that hasn't been spent. Now, what you're not seeing is people in total, you’re not seeing the economy spend into that savings. So the savings rate isn't below where it was before. And so you still got this $2.5, $2.7 trillion in excess that I think is supporting consumer consumer spending.
BRIAN CHEUNG: And so kind of to bridge back to Fed policy here. You're in the midst of tapering your program right now, that was announced at the beginning of this month. It's going to start this month. I guess the idea is that the pacing would allow you to wrap up all asset purchases by the middle of next year. How do you think about the optionality on raising rates if inflation does prove to be a bit more sticky than policymakers are seeing right now?
TOM BARKIN: Well, I like what [Fed Chairman] Jay [Powell] said in his last press conference, which is: we’ll be patient but we're not going to hesitate. And so if the need is there, we'll do what we have to do, but I personally think it's very helpful for us to have a few more months to evaluate, is inflation going to come back to more normal levels? Is the labor market going to open up as people spend through some of this savings, perhaps after Christmas, come back in the workforce as COVID declines? And so I think it's helpful to have some time to see where reality is in this economy. And if the need to act is there, we'll do what we need to do.
BRIAN CHEUNG: So let's go back to the labor market, because that's a big part of this equation as well, right? The Federal Reserve has been very clear that “substantial further progress” is not attached for raising rates, it would have to be really kind of closing the shortfalls from maximum employment. What is maximum employment in the dynamic of this labor market? Has there been any sort of permanent change to it that would imply it can't get to the same levels or numbers as you had pre pandemic? Or is there some good faith that you can get everyone who is currently out of the labor market back into the labor force?
TOM BARKIN: I think that's the core question. I mean, what we've seen — we know that underlying what's happening to the labor force is a declining trend in labor because of demographics. Fertility is down, people are aging, immigration is down. So you've just got a smaller base. If you go back to the last upturn, what you saw was a significant excess of workforce participation above that trend. We've now come back down to the trend and the question for me is: is the aberration today, and people will get back to work? Or was the aberration the end of the last upturn or somewhere in between and that's what we're going to get a lot more news on. Importantly, as we get COVID falling behind us, because I'm certainly one of those people who thought in September, schools would be open, child care would be open COVID be down, unemployment insurance would have expired, we'd have gotten more people in the workforce. So we just didn't see that. And so now we’ll give it a few more months. If we can get COVID behind us then we'll see.
BRIAN CHEUNG: Now, at the same time, there's been some discussion, though, that some those particularly over 55 have retired for good, they're not coming back. There's also just kind of lingering questions about whether or not some women and those that have been disproportionately affected by the pandemic will be on the sidelines forever. So how helpful is looking at other types of data sources? I've talked about for example, labor turnover from the [Job Opening and Labor Turnover] Survey, which showed last week a record amounts of quits in the month of September. Are you gleaning anything from those types of data releases and those pulses about where maximum employment might be?
TOM BARKIN: Well, I think the labor market as having three different pieces to it. There's a piece to it, which is the skilled trades — think carpentry, manufacturing, even nursing. They were short before the downturn. Demand has spiked in all of those sectors. And they're short today. And the issue there isn't demand, the issue there is getting more people interested in those trades and getting trained and certified and licensed into that. So that's one whole set of issues. There's a second issue in the frontline labor, and that's really where the quits are elevated. And you can imagine why. If you were working for $10 or $11 or $12 at a fast food place, and you could get a job for $15 at Amazon, why wouldn’t you go there? And a lot of people have left those sectors, perhaps because they got laid off and found other jobs. Perhaps because they don't want to work in a mask, perhaps because they're still nervous about COVID. Who knows why. But there's a lot fewer workers interested in those segments, and that's why you're seeing strong quits in those sectors. The sector we haven't really seen as much quits on yet, but I still think there's more to come, is in the professional class, where you're starting to see some turnover. And of course, people are very busy working hard, maybe they’re reassessing their lives. And so I think you will see more turnover to come in those sectors.
BRIAN CHEUNG: Now, you've talked a lot about this idea of the Great Resignation, and you've kind of just touched on the wages aspect of that. When you look at the BLS reports on a monthly basis, how important are wages? Because a lot of people are reading that within the context of: this is us trying to draw, based on where labor costs are, whether or not those inflationary pressures will be persistent. Because if you keep them on payroll, that's going to be likely more of a persistent increase than a temporary increase. But at the same time, the Federal Reserve has also made it clear that it's not just wages that are important for getting people back to work, is making sure that you actually get the people who don't have a job back into a job. So how important is the wage number when those reports come out?
TOM BARKIN: Well I’m looking at wages as a sign of how tight it is. And again, I look at it across those three sectors. So I try to look hard at the leisure and hospitality jobs as an example for one sector, or the manufacturing jobs as example for the other, and see what's happening and then I think importantly, participation is absolutely critical. And I think you can just make the case that right now, if you're not getting more people in the workforce, businesses are trading one another's workers, and they're bidding in an auction for each other's workers. I was with a hospital talking about traveling nurses the other day, and it just sounds like the industry has moved toward everyone's traveling, even if they're traveling within a metro area, because they're all just bidding for one another as nurses and I think until you get more participation in the workforce, that's the dynamic you're gonna have.
BRIAN CHEUNG: Yeah, the nursing field is one place where we've heard so many anecdotes of people feeling burnt out and then quitting and actually leaving the industry entirely. We'll save that for another time but want to ask about how you talked about just kind of different industries. What about different types of demographics, we talked about rural versus urban, your district covers the entirety of North and South Carolina? Are you seeing any sort of difference in the economic recovery in those regions?
TOM BARKIN: Well, it all depends on where you sit. But I'd say there's real opportunity for smaller towns that have trouble getting workers. Think of a two-career couple. You know, now one of them can work remote, you might actually be able to get them to move to that town. Now, not every town is going to benefit from that. The ones that are going to benefit are ones that have amenities, ones that have broadband. Manufacturing towns are benefiting because of what's happening in those markets. And I think all of the stimulus money has a real opportunity for small towns. There's $65 billion allocated to broadband in this infrastructure bill, if that can get deployed into these small towns, you really can set them up with a much better, more attractive offer for workers. I think the opportunity is there, but it's a competition. And it's a competition among these small towns. And those that seem to have the best amenities, the best product, I think are advantaged that competition.
BRIAN CHEUNG: A bigger picture question here. A lot of discussion about stagflation, some people thinking that we're in a stagflationary environment which would imply a 1970s-era period of low growth and high inflation. Is that something that you're seeing from your vantage point at the Richmond Fed?
TOM BARKIN: Not at all. In fact, as I said, I think demand is extremely strong. So we don't have a situation of slow growth. We have a situation of very strong growth, frankly, growth that is overwhelming the capacity — both labor and supplies of the economy to handle it.
BRIAN CHEUNG: But is that something that you're hearing from people in your district and the workers and hiring managers in your district about these types of economic concerns? Because it just feels like over the past few months, there's been kind of this heightened sensitivity to the macro picture at hand here that maybe it's overheating at a rate that is not sustainable?
TOM BARKIN: Well, I think it's fair to say there's a lot more attention and you mentioned the sentiment survey, Michigan survey earlier. You know, there's a funny situation, you'll talk to a small company and they'll say, “gosh, my costs are up and I can't find any workers. And we had the best year ever.” And I think there's a lot of that going on now, which is: they're having their best year ever, but they're just nervous, concerned about some of these things and the inflationary pressures that you're seeing. It's a dichotomy, but it's very real.
BRIAN CHEUNG: Right. And lastly, here, I want to ask about, obviously the big headlines that have been swirling around the Federal Reserve over the past few weeks. There's an ethics review that was done by the Fed, Chairman Jay Powell did announce some changes that happened after two of your colleagues in Boston and Dallas stepped down after some of the trading that was done over the course of 2020. I'm just wondering how you have personally approached your financial interests over the course of this pandemic, but also through the recovery. And do you feel like these tightened ethics guidelines are really doing enough to make sure that you can maintain the credibility of the central bank?
TOM BARKIN: Well, we have a set of policies that I'm told served us well for decades. I think, in the context of all the new stuff that we did during the pandemic. It's entirely appropriate to take a fresh look at it and I think what the chair has put forward is very reasonable, and I certainly plan to follow every bit of it.
BRIAN CHEUNG: Federal Reserve Bank of Richmond President Tom Barkin in a wide ranging conversation here on Yahoo Finance. Thanks so much for joining us on this Monday. Have a great week.
TOM BARKIN: Thanks, Brian.