April 19, 2024 • 17 mins
At the end of 2023, there was a lot of optimism that the US economy was on that glide path to a soft landing. But at least in the first quarter of this year, inflation has come in hotter than expected. So is this just a speedbump on the way back down to 2%? Or is this a new trajectory for inflation that will make the Federal Reserve rethink its existing approach? On this bonus episode of Odd Lots, we caught up with Richmond Fed President Tom Barkin in Mount Airy, North Carolina, to get his assessment of the latest data, and what it means for policy. He explains why he thinks policy is still restrictive, and why he doesn’t see evidence yet of overheating demand.
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Speaker 1 (00:03):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:20):
Hello and welcome to another episode of the aud Lots podcast.
I'm Tracy Alloway.
Speaker 3 (00:24):
And I'm Jico Wisenthal.
Speaker 2 (00:26):
So, Joe, we have a treat for authoughts listeners.
Speaker 3 (00:29):
That's right, we have a special episode of the podcast
with Richmond Fed President Tom Barkin.
Speaker 2 (00:35):
So we were actually on a reporting trip shadowing Tom
as he goes through some of his district and speaks
to local business leaders there. We learned a lot, We
spent a lot of time with him. You'll hear more
from that trip in an upcoming odd Lots episode, But
in the meantime, we also talked to him about some
more macro trends, things that are happening right now that
(00:58):
he's seeing in the economy, and we're going to share
that portion of the interview with you right now.
Speaker 3 (01:05):
So, so far in twenty twenty four, we've seen three
hotter than generally. The inflation data has been hotter than expected,
and some of the there's certainly been some cold water
on some of the soft landing optimism. What do you
attribute that too, is do you think this is a
new trend or is it a speed bump in the road,
as they say.
Speaker 4 (01:24):
Well, so, I think there are two interesting things going
on with the data. One is demand has been pretty robust,
against most expectations that it would slow down. We got
retail sales this week very strong. We've got three strong
job reports this year, and so the economy in general
still seems to be very healthy, and I think a
lot of people wondered whether, you know, we weren't at
(01:46):
the end of a growth period. Still seems to be strong.
At the same time, inflation has remained stubbornly above three percent,
you know, on a monthly annualized rate, and you know,
there are lots of ways to interpret it. I am
from the school that no one's as good as they
are on their best day or as bad as they
are on their worst. The seven months before the end
(02:07):
of the year we ran at one point nine percent
headline inflation. The last three months have been somewhat higher.
If you took the ten month number, it's not that
bad actually, and so I think the overall story that
inflation's moderating is still the right story. But I've been
of the view that inflation has been will be more
(02:27):
stubborn to come back to two percent than we would like,
and in particular in the last half of last year,
part of the reason the numbers came back so nicely
was that goods turned deflationary, and that offset still higher
than normal levels of inflation on services in shelter. We're
not trying to pick a particular mix of inflation, but
(02:49):
it did make me worry that if goods price reductions ceased,
you'd still be left with higher than normal services in shelter,
and that's what's happened in the first quarter year. Is
there still room for goods to reduce, of course? Is
there still a story of why shelter might come down
with new rents coming down, of course and with wages
normalizing services. Absolutely, but it hasn't happened yet.
Speaker 2 (03:13):
On this note, the last time we spoke to on
the podcast, you talked about the need to maybe offset
housing strength in a different area. So if housing has
proved to be surprisingly resilient, maybe you need to see
an offset somewhere else in the economy. Is that still
your thinking.
Speaker 4 (03:32):
Well, I'm open to housing coming down, and there are
folks who've done models that suggest that with new rents
coming down the way they have, we're just minutes away
from shelter inflation coming down as well, and that would
be great. If it doesn't come down and you want
to get to two percent, then either goods or services
or both need to run at less than their historic
levels of inflation. That's just simple, simple math. And if
(03:54):
it doesn't come down, that's what you'd be looking for
in some sense that relative prices have changed in a way.
And I want to make this point that that's entirely conceivable.
Relative prices change all the time. In the two thousands,
we had healthcare inflation that was quite significant and much
more than it was in the nineties. But you know,
goods price deflation came down, so the basket does shift,
(04:16):
and it's fine if it shifts, just needs to get
to two percent.
Speaker 3 (04:18):
Overall, there's sort of whispers out there and some people
talk about it, and you can kind of see it
in the rates options markets and stuff. But there is
this talk like, what if the hiking cycle isn't actually over?
What if the next rate move is not a cut
as has been the presumption for a while, What do
you think it would have to take or what would
you have to see in the data to say, no,
(04:42):
this isn't just a matter of waiting for the improvement
to occur. There is a reason to do more work.
Speaker 4 (04:49):
It would have to be around inflation reaccelerating, and you know,
having conviction that you need to do.
Speaker 3 (04:53):
And when like, I mean, okay, so we've had this
little three month pick up from the previous seven months,
what is like, Okay, this is actually inflation reaccelerated rather.
Speaker 2 (05:02):
Than just a durable trend versus a blip.
Speaker 3 (05:06):
Yeah, what does that look like? Well, put, I'm gonna
say what is the durable? What constitutes a durable trend?
Speaker 4 (05:15):
I mean a trend that is durable. I think it's
really hard to get into hypotheticals here, you know, what
I'll what I'll say is we're in a situation today
where demand is robust, but I see no signs yet
that it's overheating. And overheating would lead to pressure on wages,
woul lead to pressure on prices such the things we're escalating,
(05:37):
and you can't find that in the wage numbers or
even in the three month price numbers. And you can't
find that. So you know, demand is robust but not overheating,
and inflation is has come down and it's still coming
down on a twelve month basis, but it is stubbornly
you know, at least over the last three months plateaued
above our target. And so I think that makes policy
pretty straightforward. With today's world, which is you have restrictive
(06:00):
rates and you want to be restrictive and bring inflation down.
You can come up with scenarios where those the two
parts of our mandate are in different balance. But right
now I think you've got healthy but not overheated demand
and you've got inflation that remain stubbornly high. So I think,
to me, the polsipath is pretty straightforward.
Speaker 2 (06:17):
I think you anticipated my next question. But you say
rates are restrictive, how are you judging the restrictiveness of
monetary policy, Because when I look at something like the
financial Conditions Index, up until the past week or so,
or even few days, it was pretty loose. And so
there seems to be a disconnect between a certain number
(06:39):
of Fed officials who will say policy is restrictive versus
looking at something like that financial conditions index, or even
the amount of refinancing being undertaken by the corporate bond
market or the loan market recently.
Speaker 4 (06:52):
Right, so there are many financial conditions indices, some of
them show looser than others. The ones that seem to
sort the loosest are the ones that put the most
weight on the equity markets. Obviously we were with our
carport manufacturer today. He would certainly say financial conditions are tight.
And it's very clear to me as I talk around
the economy that there are significant sectors where financial conditions
(07:13):
are tight, and they do tend to be those sectors
like this guy who's most vulnerable to construction and to
home right and people spending around their home, and in
his case RVs, RV garage covers are a big part
of what he does. And of course RVs went crazy,
but people aren't buying r v's at the same pace anymore.
So I do see interest rates going to the economy,
(07:35):
and I see that answering. But I also think it's
fair to say the level of re strictness is something
you take at some faith. I do like to look
at you know, real tip yields to give me some sense,
But you are comparing it to a hypothetical, not a hypothetical,
a estimated our star. That is hard to know where
you really are. And there are lots of estimates, including
one from the Richmond FED, that are higher than most
(07:58):
people's standard are stars. So yeah, be open to the
notion that the level of restrictiveness is less than you think.
And you would learn that through the economy. You learn
that through demand accelerating more than you'd think it would,
and that's something you have to be attentive to. I
haven't yet concluded that the overheating would be that would
be part of your case for doing more would be overheating.
(08:18):
So you don't think as you're as restrictive as you
thought you were, which meant you have to do a
little more.
Speaker 3 (08:22):
I just have one more question. But when it comes
to you know, housing obviously just you know, it's a
big driver of the upward pressure on inflation through various measures.
It's also sort of this major societal problem that people
are frustrated with almost across the country. When you're thinking
about rate policy, how much like do you think about
(08:43):
now just okay, what's going to happen in the next
three months or whatever, but how much does restrictive policy
today restrain the housing supply of tomorrow, whether it's like
a multifamily. We got recent numbers that new multifamily development
has really fallen off quite a bit. In theory, that
means housing more scarcity in twenty twenty six or whatever.
(09:05):
Do you fold that into your thinking in terms of
policy today.
Speaker 4 (09:09):
You try to think it through as best you can.
Don't forget that the impact of higher rates on housing
demand is pretty immediate, and the impact of higher rates
on housing supply, because it gets delivered two years later,
is more further out. And when we started raising rates,
we were in the middle of as frothy a period
in the housing market. As I remember, you know, twelve
(09:30):
bids per house, houses going for forty thousand dollars over list,
and you know, so low rates wasn't the answer to
that particular supply and demand issue. I think this theory
of the case is that you raise rates, it brings
down demand to levels more in balance with supply, and
while it may have an impact with supply, you get
inflation under control, and then you can lower rates again
(09:51):
so that supply can blossom. I think that's the theory
of the case. I'll point out that in this and
I mean you mentioned multi family, but single family starts
are quite strong, been much stronger than normal in this cycle.
In part because I think availability of existing homes has
been so low, and multifamily starts have come down a bunch,
but that was from a very very high peak, and
(10:11):
so they're not that far off today where they were
before the pandemic, and so we're stuff still getting built.
There is a future potential challenge and supply, but I
think the hope is that, you know, demand comes off
enough that we can bring that market into better balance.
Speaker 2 (10:44):
Just going back to the inflation outlook, I think at
this point there have been a number of FED officials
who seem to have suggested that the worst outcome of
the current monetary policy cycle, or one of the worst outcomes,
would be if they decided to start easing only to
see inflation pick back up again. And I guess my
(11:05):
question is, why, why is that so bad? Because couldn't
you just alter course? Couldn't you start tightening again if
you saw that in the data.
Speaker 4 (11:15):
Well, I think it's hard to do my job and
not be aware of the seventies. And I remember the seventies.
It wasn't pretty. I also had bad hair in that era.
But you know what happened in the seventies. This is
the fundamental object lesson of monetary policy is every time
there was the slightest hint that the economy could be
turning down, they lowered rates, and then inflation came back up,
(11:37):
and then they increased rates. And the issue is when
the FED doesn't look like it's resolute on inflation, inflation
doesn't come back to where it was before, it comes
to higher than it was before, which means that every
time to fight it, you've got to take rates even higher,
which means that the damage you do the economy is
even more. And so letting it expectations spiral out of control,
(11:58):
I think is just a very risky thing for the economy.
And that's not some theoretical model. We actually lived it
in the seventies and and much like me, the seventies
weren't pretty.
Speaker 2 (12:08):
Just because you mentioned our star and the neutral rate
and I get the sense. And this is just based
off of a Bank for International Settlements paper that came
out a couple of weeks ago, but they basically suggested
that maybe our star is that our stars time in
the spotlight has kind of come and gone, and the
ideas that while we should be focused more on what
(12:29):
the actual inflation data is telling us rather than some hypothetical, unknown,
neutral rate that we're having to estimate and triangulate from
a variety of factors. Does our stars still loom large
in the fed's thinking or do you think it's been
sort of superseded by what we've seen in the real economy.
Speaker 4 (12:47):
Well, I think we certainly spend a lot of time
trying to understand and think about our star and where
it's headed. Not because I believe that there's one precise
point estimate. The standard deviations around most estimates are quite wide,
but because I think you have to do have to
ask yourself the question, are you restrictive or restrictive enough
for what you're trying to do to inflation? So you
(13:10):
ask yourself that question, and if the economy comes in
more robust and inflation comes in more orbust, than you
ask yourself the question whether your prior assumption was right
or not, and if it comes in south of where
you thought, which is what happened for most of the
twenty tens, then you ask yourself the question of whether
your estimate of our star was too high. And so
most estimates in the twenty tens came down significantly. Some
(13:31):
of that was done by models. Some of that was
done by just observation of an economy that didn't seem
very robust despite extremely low rates. If we if our
economy continues to be as robust it is with rates
where they are, I think that'll tell you something.
Speaker 3 (13:44):
If it's changed.
Speaker 4 (13:45):
Why there are a lot of people who are better
at those models than i am. I think productivity would
be a very simple way to explain the change. A
higher productivity economy is a higher trend growth economy, which
would do it. You might argue fiscal you know, has
some thing to do with it, and certainly we're at
a different level of fiscal spend today than we were
in the early twenty tens. But again I'm not going
(14:07):
to profess to be the expert on that.
Speaker 2 (14:09):
I ask a question, why is it two percent?
Speaker 4 (14:12):
Is it because of the expectations part is more important
than the actual number. That's like you're trying to set up.
So there was a debate, you know why two percent?
There was a debate in the nineties actually, and the
Richmond Fed was right in the middle of it. Al
brought us about what the right target should be. Interestingly,
at the time, the choice was between zero and two right,
because our mandate is stable prices, and there were those
(14:35):
who thought stable means stable. Stable zero is stable. It
was widely debated the way, all the way till it
was announced in twenty twelve. But nowhere in that debate
can you find evidence that people were debating three, four
or five. They were debating one or one and a
half or two or zero. Why pick two? Well, a
few things that are relevant. Pretty much every central bank
in the world has two plus or minus. Some have
(14:57):
up to two or one and a half to two
and a half. Second, it seems to have worked for
thirty years. I mean we actually delivered it, so it's
not some random number you could never get to.
Speaker 3 (15:06):
Third.
Speaker 4 (15:06):
There is mismeasurement in there, and the mismeasurement is actually
thought by most people to say that actual inflation is
a little bit less than the two percent number. A
good example would be encyclopedias. Used to buy and I
used to buy encyclopedia. No one buys an encyclopedia Today.
It's on your phone, and so it's out of the index,
and so it's gone from being whatever world book was,
(15:29):
you know, three hundred and ninet nine dollars to zero.
That's deflation, but it's out of the index. And so technology,
actually you're not buying a camera anymore or film is
taking the set of things out of the index that
you know deflationary. But maybe the best reason is it's
really hard to hit your target exactly. If you set
a target at zero and you don't hit it exactly,
you're in deflationary territory. And deflation is where everything tomorrow
(15:52):
costs less than it does today. So the incentive to
buy today goes down, which means an economy you know,
tends to stagnate, and that's Japan and what has been through.
So two gives you a little bit of room against zero,
means we can do a little bit to cut rates
when we need to. That's the theory of it.
Speaker 2 (16:06):
And you said, since it's work, there's no need to
change it.
Speaker 4 (16:11):
Yeah, And in particular, you'd never change it before you
hit it. And so we're out there trying to hit
a target. If inflation is at three and you decide
new targets three, I just don't think that works for
your credibility. And that's really the major tool the FED
has is credibility.
Speaker 3 (16:28):
All Right, Tom thank you so much. That was fantastic.
Speaker 4 (16:31):
No, I love you guys. Great to with you.
Speaker 3 (16:32):
Thank you so much.
Speaker 4 (16:33):
Thank you.
Speaker 2 (16:34):
Keep that in Dash. That was our conversation with Tom Barkin.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3 (16:42):
And I'm Joe Wisenthal. You can follow me at the Stalwart.
Follow our producers Carman Rodriguez at Carman armand Dash, Ol
Bennett at Dashbot and kill Brooks at kil Brooks. And
thank you to our producer Moses Ondom. More odd Laws
content go to Bloomberg dot com slash odd Lot, where
we have transcripts, a blog, and a newsletter that comes
out every Friday. And you could chat with fellow listeners
(17:02):
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Speaker 2 (17:06):
Out Lots and if you enjoy odd Lots, if you
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leave us a positive review on your favorite podcast platform.
Thanks for listening.
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:20):
Hello and welcome to another episode of the aud Lots podcast.
I'm Tracy Alloway.
Speaker 3 (00:24):
And I'm Jico Wisenthal.
Speaker 2 (00:26):
So, Joe, we have a treat for authoughts listeners.
Speaker 3 (00:29):
That's right, we have a special episode of the podcast
with Richmond Fed President Tom Barkin.
Speaker 2 (00:35):
So we were actually on a reporting trip shadowing Tom
as he goes through some of his district and speaks
to local business leaders there. We learned a lot, We
spent a lot of time with him. You'll hear more
from that trip in an upcoming odd Lots episode, But
in the meantime, we also talked to him about some
more macro trends, things that are happening right now that
(00:58):
he's seeing in the economy, and we're going to share
that portion of the interview with you right now.
Speaker 3 (01:05):
So, so far in twenty twenty four, we've seen three
hotter than generally. The inflation data has been hotter than expected,
and some of the there's certainly been some cold water
on some of the soft landing optimism. What do you
attribute that too, is do you think this is a
new trend or is it a speed bump in the road,
as they say.
Speaker 4 (01:24):
Well, so, I think there are two interesting things going
on with the data. One is demand has been pretty robust,
against most expectations that it would slow down. We got
retail sales this week very strong. We've got three strong
job reports this year, and so the economy in general
still seems to be very healthy, and I think a
lot of people wondered whether, you know, we weren't at
(01:46):
the end of a growth period. Still seems to be strong.
At the same time, inflation has remained stubbornly above three percent,
you know, on a monthly annualized rate, and you know,
there are lots of ways to interpret it. I am
from the school that no one's as good as they
are on their best day or as bad as they
are on their worst. The seven months before the end
(02:07):
of the year we ran at one point nine percent
headline inflation. The last three months have been somewhat higher.
If you took the ten month number, it's not that
bad actually, and so I think the overall story that
inflation's moderating is still the right story. But I've been
of the view that inflation has been will be more
(02:27):
stubborn to come back to two percent than we would like,
and in particular in the last half of last year,
part of the reason the numbers came back so nicely
was that goods turned deflationary, and that offset still higher
than normal levels of inflation on services in shelter. We're
not trying to pick a particular mix of inflation, but
(02:49):
it did make me worry that if goods price reductions ceased,
you'd still be left with higher than normal services in shelter,
and that's what's happened in the first quarter year. Is
there still room for goods to reduce, of course? Is
there still a story of why shelter might come down
with new rents coming down, of course and with wages
normalizing services. Absolutely, but it hasn't happened yet.
Speaker 2 (03:13):
On this note, the last time we spoke to on
the podcast, you talked about the need to maybe offset
housing strength in a different area. So if housing has
proved to be surprisingly resilient, maybe you need to see
an offset somewhere else in the economy. Is that still
your thinking.
Speaker 4 (03:32):
Well, I'm open to housing coming down, and there are
folks who've done models that suggest that with new rents
coming down the way they have, we're just minutes away
from shelter inflation coming down as well, and that would
be great. If it doesn't come down and you want
to get to two percent, then either goods or services
or both need to run at less than their historic
levels of inflation. That's just simple, simple math. And if
(03:54):
it doesn't come down, that's what you'd be looking for
in some sense that relative prices have changed in a way.
And I want to make this point that that's entirely conceivable.
Relative prices change all the time. In the two thousands,
we had healthcare inflation that was quite significant and much
more than it was in the nineties. But you know,
goods price deflation came down, so the basket does shift,
(04:16):
and it's fine if it shifts, just needs to get
to two percent.
Speaker 3 (04:18):
Overall, there's sort of whispers out there and some people
talk about it, and you can kind of see it
in the rates options markets and stuff. But there is
this talk like, what if the hiking cycle isn't actually over?
What if the next rate move is not a cut
as has been the presumption for a while, What do
you think it would have to take or what would
you have to see in the data to say, no,
(04:42):
this isn't just a matter of waiting for the improvement
to occur. There is a reason to do more work.
Speaker 4 (04:49):
It would have to be around inflation reaccelerating, and you know,
having conviction that you need to do.
Speaker 3 (04:53):
And when like, I mean, okay, so we've had this
little three month pick up from the previous seven months,
what is like, Okay, this is actually inflation reaccelerated rather.
Speaker 2 (05:02):
Than just a durable trend versus a blip.
Speaker 3 (05:06):
Yeah, what does that look like? Well, put, I'm gonna
say what is the durable? What constitutes a durable trend?
Speaker 4 (05:15):
I mean a trend that is durable. I think it's
really hard to get into hypotheticals here, you know, what
I'll what I'll say is we're in a situation today
where demand is robust, but I see no signs yet
that it's overheating. And overheating would lead to pressure on wages,
woul lead to pressure on prices such the things we're escalating,
(05:37):
and you can't find that in the wage numbers or
even in the three month price numbers. And you can't
find that. So you know, demand is robust but not overheating,
and inflation is has come down and it's still coming
down on a twelve month basis, but it is stubbornly
you know, at least over the last three months plateaued
above our target. And so I think that makes policy
pretty straightforward. With today's world, which is you have restrictive
(06:00):
rates and you want to be restrictive and bring inflation down.
You can come up with scenarios where those the two
parts of our mandate are in different balance. But right
now I think you've got healthy but not overheated demand
and you've got inflation that remain stubbornly high. So I think,
to me, the polsipath is pretty straightforward.
Speaker 2 (06:17):
I think you anticipated my next question. But you say
rates are restrictive, how are you judging the restrictiveness of
monetary policy, Because when I look at something like the
financial Conditions Index, up until the past week or so,
or even few days, it was pretty loose. And so
there seems to be a disconnect between a certain number
(06:39):
of Fed officials who will say policy is restrictive versus
looking at something like that financial conditions index, or even
the amount of refinancing being undertaken by the corporate bond
market or the loan market recently.
Speaker 4 (06:52):
Right, so there are many financial conditions indices, some of
them show looser than others. The ones that seem to
sort the loosest are the ones that put the most
weight on the equity markets. Obviously we were with our
carport manufacturer today. He would certainly say financial conditions are tight.
And it's very clear to me as I talk around
the economy that there are significant sectors where financial conditions
(07:13):
are tight, and they do tend to be those sectors
like this guy who's most vulnerable to construction and to
home right and people spending around their home, and in
his case RVs, RV garage covers are a big part
of what he does. And of course RVs went crazy,
but people aren't buying r v's at the same pace anymore.
So I do see interest rates going to the economy,
(07:35):
and I see that answering. But I also think it's
fair to say the level of re strictness is something
you take at some faith. I do like to look
at you know, real tip yields to give me some sense,
But you are comparing it to a hypothetical, not a hypothetical,
a estimated our star. That is hard to know where
you really are. And there are lots of estimates, including
one from the Richmond FED, that are higher than most
(07:58):
people's standard are stars. So yeah, be open to the
notion that the level of restrictiveness is less than you think.
And you would learn that through the economy. You learn
that through demand accelerating more than you'd think it would,
and that's something you have to be attentive to. I
haven't yet concluded that the overheating would be that would
be part of your case for doing more would be overheating.
(08:18):
So you don't think as you're as restrictive as you
thought you were, which meant you have to do a
little more.
Speaker 3 (08:22):
I just have one more question. But when it comes
to you know, housing obviously just you know, it's a
big driver of the upward pressure on inflation through various measures.
It's also sort of this major societal problem that people
are frustrated with almost across the country. When you're thinking
about rate policy, how much like do you think about
(08:43):
now just okay, what's going to happen in the next
three months or whatever, but how much does restrictive policy
today restrain the housing supply of tomorrow, whether it's like
a multifamily. We got recent numbers that new multifamily development
has really fallen off quite a bit. In theory, that
means housing more scarcity in twenty twenty six or whatever.
(09:05):
Do you fold that into your thinking in terms of
policy today.
Speaker 4 (09:09):
You try to think it through as best you can.
Don't forget that the impact of higher rates on housing
demand is pretty immediate, and the impact of higher rates
on housing supply, because it gets delivered two years later,
is more further out. And when we started raising rates,
we were in the middle of as frothy a period
in the housing market. As I remember, you know, twelve
(09:30):
bids per house, houses going for forty thousand dollars over list,
and you know, so low rates wasn't the answer to
that particular supply and demand issue. I think this theory
of the case is that you raise rates, it brings
down demand to levels more in balance with supply, and
while it may have an impact with supply, you get
inflation under control, and then you can lower rates again
(09:51):
so that supply can blossom. I think that's the theory
of the case. I'll point out that in this and
I mean you mentioned multi family, but single family starts
are quite strong, been much stronger than normal in this cycle.
In part because I think availability of existing homes has
been so low, and multifamily starts have come down a bunch,
but that was from a very very high peak, and
(10:11):
so they're not that far off today where they were
before the pandemic, and so we're stuff still getting built.
There is a future potential challenge and supply, but I
think the hope is that, you know, demand comes off
enough that we can bring that market into better balance.
Speaker 2 (10:44):
Just going back to the inflation outlook, I think at
this point there have been a number of FED officials
who seem to have suggested that the worst outcome of
the current monetary policy cycle, or one of the worst outcomes,
would be if they decided to start easing only to
see inflation pick back up again. And I guess my
(11:05):
question is, why, why is that so bad? Because couldn't
you just alter course? Couldn't you start tightening again if
you saw that in the data.
Speaker 4 (11:15):
Well, I think it's hard to do my job and
not be aware of the seventies. And I remember the seventies.
It wasn't pretty. I also had bad hair in that era.
But you know what happened in the seventies. This is
the fundamental object lesson of monetary policy is every time
there was the slightest hint that the economy could be
turning down, they lowered rates, and then inflation came back up,
(11:37):
and then they increased rates. And the issue is when
the FED doesn't look like it's resolute on inflation, inflation
doesn't come back to where it was before, it comes
to higher than it was before, which means that every
time to fight it, you've got to take rates even higher,
which means that the damage you do the economy is
even more. And so letting it expectations spiral out of control,
(11:58):
I think is just a very risky thing for the economy.
And that's not some theoretical model. We actually lived it
in the seventies and and much like me, the seventies
weren't pretty.
Speaker 2 (12:08):
Just because you mentioned our star and the neutral rate
and I get the sense. And this is just based
off of a Bank for International Settlements paper that came
out a couple of weeks ago, but they basically suggested
that maybe our star is that our stars time in
the spotlight has kind of come and gone, and the
ideas that while we should be focused more on what
(12:29):
the actual inflation data is telling us rather than some hypothetical, unknown,
neutral rate that we're having to estimate and triangulate from
a variety of factors. Does our stars still loom large
in the fed's thinking or do you think it's been
sort of superseded by what we've seen in the real economy.
Speaker 4 (12:47):
Well, I think we certainly spend a lot of time
trying to understand and think about our star and where
it's headed. Not because I believe that there's one precise
point estimate. The standard deviations around most estimates are quite wide,
but because I think you have to do have to
ask yourself the question, are you restrictive or restrictive enough
for what you're trying to do to inflation? So you
(13:10):
ask yourself that question, and if the economy comes in
more robust and inflation comes in more orbust, than you
ask yourself the question whether your prior assumption was right
or not, and if it comes in south of where
you thought, which is what happened for most of the
twenty tens, then you ask yourself the question of whether
your estimate of our star was too high. And so
most estimates in the twenty tens came down significantly. Some
(13:31):
of that was done by models. Some of that was
done by just observation of an economy that didn't seem
very robust despite extremely low rates. If we if our
economy continues to be as robust it is with rates
where they are, I think that'll tell you something.
Speaker 3 (13:44):
If it's changed.
Speaker 4 (13:45):
Why there are a lot of people who are better
at those models than i am. I think productivity would
be a very simple way to explain the change. A
higher productivity economy is a higher trend growth economy, which
would do it. You might argue fiscal you know, has
some thing to do with it, and certainly we're at
a different level of fiscal spend today than we were
in the early twenty tens. But again I'm not going
(14:07):
to profess to be the expert on that.
Speaker 2 (14:09):
I ask a question, why is it two percent?
Speaker 4 (14:12):
Is it because of the expectations part is more important
than the actual number. That's like you're trying to set up.
So there was a debate, you know why two percent?
There was a debate in the nineties actually, and the
Richmond Fed was right in the middle of it. Al
brought us about what the right target should be. Interestingly,
at the time, the choice was between zero and two right,
because our mandate is stable prices, and there were those
(14:35):
who thought stable means stable. Stable zero is stable. It
was widely debated the way, all the way till it
was announced in twenty twelve. But nowhere in that debate
can you find evidence that people were debating three, four
or five. They were debating one or one and a
half or two or zero. Why pick two? Well, a
few things that are relevant. Pretty much every central bank
in the world has two plus or minus. Some have
(14:57):
up to two or one and a half to two
and a half. Second, it seems to have worked for
thirty years. I mean we actually delivered it, so it's
not some random number you could never get to.
Speaker 3 (15:06):
Third.
Speaker 4 (15:06):
There is mismeasurement in there, and the mismeasurement is actually
thought by most people to say that actual inflation is
a little bit less than the two percent number. A
good example would be encyclopedias. Used to buy and I
used to buy encyclopedia. No one buys an encyclopedia Today.
It's on your phone, and so it's out of the index,
and so it's gone from being whatever world book was,
(15:29):
you know, three hundred and ninet nine dollars to zero.
That's deflation, but it's out of the index. And so technology,
actually you're not buying a camera anymore or film is
taking the set of things out of the index that
you know deflationary. But maybe the best reason is it's
really hard to hit your target exactly. If you set
a target at zero and you don't hit it exactly,
you're in deflationary territory. And deflation is where everything tomorrow
(15:52):
costs less than it does today. So the incentive to
buy today goes down, which means an economy you know,
tends to stagnate, and that's Japan and what has been through.
So two gives you a little bit of room against zero,
means we can do a little bit to cut rates
when we need to. That's the theory of it.
Speaker 2 (16:06):
And you said, since it's work, there's no need to
change it.
Speaker 4 (16:11):
Yeah, And in particular, you'd never change it before you
hit it. And so we're out there trying to hit
a target. If inflation is at three and you decide
new targets three, I just don't think that works for
your credibility. And that's really the major tool the FED
has is credibility.
Speaker 3 (16:28):
All Right, Tom thank you so much. That was fantastic.
Speaker 4 (16:31):
No, I love you guys. Great to with you.
Speaker 3 (16:32):
Thank you so much.
Speaker 4 (16:33):
Thank you.
Speaker 2 (16:34):
Keep that in Dash. That was our conversation with Tom Barkin.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3 (16:42):
And I'm Joe Wisenthal. You can follow me at the Stalwart.
Follow our producers Carman Rodriguez at Carman armand Dash, Ol
Bennett at Dashbot and kill Brooks at kil Brooks. And
thank you to our producer Moses Ondom. More odd Laws
content go to Bloomberg dot com slash odd Lot, where
we have transcripts, a blog, and a newsletter that comes
out every Friday. And you could chat with fellow listeners
(17:02):
in the discord twenty four to seven Discords GG Slash.
Speaker 2 (17:06):
Out Lots and if you enjoy odd Lots, if you
like it when we speak to FED presidents, then please
leave us a positive review on your favorite podcast platform.
Thanks for listening.
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