C. Peter McColough Series on International Economics With Tom Barkin

Richmond Fed President Tom Barkin discusses U.S. monetary policy and the outlook for inflation and labor markets.

The C. Peter McColough Series on International Economics brings the world’s foremost economic policymakers and scholars to address members on current topics in international economics. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

LIPSKY: Good morning, and welcome to the Council on Foreign Relations.

We’re meeting this morning with Tom Larkin (sic; Barkin), president and chief executive officer of the Federal Reserve Bank of Richmond. And this meeting is part of the C. Peter McColough Series on International Economics, not just the Fed.

BARKIN: Who knew?

LIPSKY: I’m John Lipsky. I’m a senior fellow at the Foreign Policy Institute of Johns Hopkins University School of Advanced International Studies and I’ll be—I have the honor of presiding over today’s discussion. We’re joined today by CFR members attending here in person but also on Zoom.

So to start, let me introduce Tom for those who don’t know him well. First of all, you might—probably not aware he’s a native of Tampa, Florida, so that means he’s—that’s a little bit like being a citizen of the Emirates or Qatar, right? There’s a small group—

BARKIN: That’s not a comparison I was expecting.

LIPSKY: There’s a small group and a huge number of folks who came to Tampa from elsewhere. But after that upbringing he was very much educated at an institution that’s a bit in the news today up in Cambridge, Massachusetts.

He had both—he had his bachelor’s, an MBA, and a J.D., right, from Harvard, and then back to the South for a long career with McKinsey at which at one point he was a CFO, chief risk officer and based in Atlanta, if I’m not wrong, and started his—you dipped your toe into the Federal Reserve serving on the board of the Atlanta Fed. I guess it was inevitable. He did such a great job they asked him to come and run the bank in Richmond, which he’s been doing since 2018.

Tom, thank you very much for joining us today.

Now, how we’re going to run this we’re going to—I’m going to have a discussion here with Tom and then we’re going to—run for twenty-five minutes or so and then we’re going to open it up to questions here from the audience, and for those of you who are watching on Zoom, of course, you can participate as well.

Now, I thought in structuring this I’m going to ask a few conjectural questions about the current the current situation, but I’m assuming that you’re going to have a lot of questions about specifics, about what the—how the Fed interprets, et cetera.

I’m going to have in my conversation deal a bit more with a few structural issues for the Fed that might not otherwise come out and then we’ll turn it over to you.

But to start, the Federal Open Market Committee met just a couple of weeks ago, 18th and 19th of March, and among other things left the rates unchanged, characterized the economy as solid, characterized unemployment as stable, characterized inflation as still a bit elevated, and in their projections they reduced the near-term growth outlook but also reduced the near-term unemployment outlook, which was interesting.

BARKIN: Increased the unemployment outlook.

LIPSKY: Sorry, increased the unemployment outlook.

Now, since—if we look at what’s been going on in financial markets for—in recent months, I think you’ve all noted the stock prices have been on the weak side. The S&P, of course, there was a big up earlier but if we look from the end of the—the beginning of the year to now the S&P is down about 5 percent.

At the same time the—whereas the Fed rate has been, essentially, stable long-term yields have rallied enough so that, essentially, the yield curve is now—let’s call it flat.

So to begin, has anything happened in the last couple of weeks that would change your characterization of the economy? But, more broadly, what do you see as the—what message is driving financial markets at this time?

BARKIN: So the story you talk about I’d tell the same story in a slightly different way, which is if you could just go back to the end of the year, December 31, everything looked great. I mean, GDP growth was 2 ½ percent. Unemployment was 4 percent. Inflation was headed down nicely. Business optimism had surged in November.

Small business optimism jumped the most it had in forty years and then jumped again in December, and if you had asked anyone to price in the risk of a recession they would have, you know, gone to somewhere close to zero. So that was December.

We’re, obviously, another quarter in—we’re three months later—and I think what we said two weeks ago is also true today, which is that the numbers are kind of in the same place. I mean, GDP will be a little bit softer this quarter but there’s some stuff about import-exports that are in there. Consumer spending maybe is a little slower. Unemployment has stayed stable. The inflation numbers were a little higher than we wanted.

But the numbers are not really the story. The story is uncertainty, and I described it in a speech last week as we’re all out here driving in the fog, and it’s really foggy. The high beams don’t help. And what are you going to do in a fog?

And I talk to businesses, I talk to consumers, and it’s even true for the Fed—you don’t know where policy is going to land. You don’t know what the implications of that are going to be and it’s very hard to make investment decisions, hiring decisions, spending decisions, with that amount of uncertainty.

And so, you know, financial markets will tell us what they think as opposed to me telling them, but I have to think that part of the flattening of the rate curve has been pricing and more recession risk.

LIPSKY: Your Chicago colleague Austan Goolsbee—I heard him speak about a month ago and he likes to use the phrase that it’s hard to navigate because there’s a lot of dust in the air. Tomorrow this is likely to turn into a sandstorm with the announcement of trade policy.

How should the Fed be approaching this degree of uncertainty in terms of methodology?

BARKIN: Well, I think you’ve got to understand what the conditions are, and there’s always stuff that is exogenous, right, whether it’s, you know, oil price spikes or wars in countries or market movements and fiscal policy. And so you have to take it for what it is and we’ll see what it is.

By the way, we’ll see where it lands because I think a lot of people think there’ll be some back and forth before it lands, and I think you want to see what it is and then go, and then once you know what it is you can analyze and assess what the impact would be.

We have some indicators of that. You know, there were tariffs put on five years ago—2018, 2019—and you could look at the studies of what the impact was and then you can compare these to that and, you know, sort of play it out.

But until you know what the policies are going to be and how long they’re going to last I think it’s awfully hard to react to dust or fog or sandstorms.

LIPSKY: (Laughs.) Very good.

Well, now the Fed does have a formal policy framework—I guess it’s going to be former since you’re studying it—the flexible average inflation targeting framework. That framework was adopted in a context in which the Fed had—which the price performance, inflation performance, had persistently underperformed, or depending on how you want to look at it outperformed. The Fed’s target had been—inflation had been lower than the target and there was worry about the role of the lower—the zero lower bound, et cetera.

You’re now beginning the process of a formal review and I believe at the FOMC there was actually an introductory discussion about the review of the framework.

How do you go about—how are you thinking about, first, how important is the role of the formal framework and, secondly, how will you go about altering it and reviewing the current framework that, dare I say it, I think a lot of folks have found wanting in the current circumstances?

BARKIN: So for those of you who aren’t as close as John is to this, in 2012 for the first time the Fed actually laid out a framework about how we think about managing monetary policy against our statutory goals of maximum employment and stable prices, and pretty good framework. Results were pretty good during the 2010s. We said we’re going to review it every five or so years to make sure it stays contemporary with what’s happening.

If you go back to 2019 and 2020, which is when we did the last review, as you said the issue was not high inflation. The issue was low inflation, low rates—you know, how would you ever get out of this? And so that framework, if you read it today, reads a lot like a message in the bottle authored in 2019.

It was, you know, tailor built for the problems we were facing there. It doesn’t feel all that relevant to the problems of today and so we’re in the middle right now of trying to assess how do we want to evolve this.

You know, I’m confident we will evolve it. I’m hopeful that—it’s a constitutional document in my mind and so it’s something that, you know, will have resonance in different generations of the environment.

But, you know, I think we’ve still got the heavy lifting to do in terms of writing it. But I definitely think that the 2019 version doesn’t feel contemporary today and so I hope we’ll work on that.

LIPSKY: And if I could, how important should the framework be in terms of guiding expectations about actual policy decisions? In other words, should the framework be one that’s specific enough to say up, down, or leave it alone or is it more—you just used the word a constitutional document—more of an expression of broad intentions?

BARKIN: I mean, there are ways to give you clarity on up, down, or leave it alone. By the way, that’s all we do so it’s not that big of a job. (Laughter.) But—and a lot of people have introduced rules that would do that.

You know, I’d suggest those of you who like to look at the rules, you know, might look at just a reverse casting of what they would have done two years ago, four years ago, eight years ago, because lots of times it looks good to have a rule but then when you look at it you say, I wouldn’t have done that, and so that’s why judgment is also helpful in having rules.

I don’t think this is about adopting a rule. I think this is trying to help the public understand better how we think about making monetary policy and there’s a lot of work that’s been done that says if you are transparent in how you’re thinking and the public understands it then the reactions actually help you get monetary policy done.

You know, most simply, if you think about when we started raising rates in 2022 long rates moved up very quickly because people didn’t just pay attention to that one rate move; they paid attention to where they thought the path was going to go.

And I think that two-way communication, if I could put it that way, between the Fed and participants in the marketplace and the markets I think is useful in terms of helping policy, and I think the spirit of the framework is try to be as transparent as you can about how you think about things. But I don’t think it gets to the question of a rule.

LIPSKY: OK. And that brings us to the issue of Fed communication with the market.

Are you satisfied with both how it is structured, i.e., the Beige Book, the minutes, the FOMC’s statement and a press conference? Is it being done the right way and is the Fed being as well understood as you could hope for, or is there room to improve?

BARKIN: I mean, I think there’s an unhealthy amount of focus on the Fed in the financial press and the financial markets, and some of you are going to say, you’re here talking today, Tom, and you’re contributing to that. OK. But I think it’s not that healthy.

Now, I think you should take the communication that we try to do in the spirit that it’s intended, which is to try to be transparent, try to help people understand our reaction functions. But people don’t make promises or commitments. The world changes and you’ve got to change.

And so, you know, if you could shut my eyes and draw a whole new world, you know, the one world I would love to get out of is the question of how many dots—how many cuts do you have on your dot plot—(laughter)—because it’s not useful.

I mean, there’s a(n) assumption about where the economy might go. There’s a reaction function given that assumption, and that reaction function leads to a prediction of rate cuts. But who knows whether the economy is going to go that way? And when I see the Fed promises two rate cuts or whatever thing it makes me a little crazy.

But I don’t get to shut my eyes and redo the world. We are in a world of transparency. Transparency is very hard to take away, you know, once offered and so, you know, you try to adapt as best you can.

The way that looks is Jay goes to a press conference and says, yeah, pay attention to the dot plot and then in the next conference he goes, no, don’t pay attention to the dot plot. I don’t find that particularly helpful but that’s just me.

LIPSKY: Well, maybe you can convince your colleagues it’s time for a change.

Now, changing up the subject slightly—not so slightly—I spent some time around Silicon Valley, and there were some bank issues not too long ago that caused a fair amount of upset. Raises the question: What do you think is, first, the right role for the Fed in bank and financial system regulation and supervision? Are you—are you happy with the current role? Is it well understood? Or is there an issue with how the whole regulatory/supervisory framework is structured?

BARKIN: Well, start with there is an important role for bank supervision. We’ve all been through, whether it was Silicon Valley Bank or Lehman Brothers or, you know, go back through time, enough bank failures that had knock-on impacts to the economy—that the idea of, you know, somebody or some set of people looking over the shoulders of banks and helping them, you know, stay safe and sound makes good sense to me. And some of you may not agree with that, but I think that’s where I’d start.

Who does it—I’d start with the characteristics you want of somebody, which is you want a sober adult who is not trying to react to the passions of the moment but has a long-term view because banks will be healthier if they know what the rules are and how they’re being inspected against those rules.

I’ve been impressed in the time I’ve been with the Fed with the quality of the supervisors and the supervisor teams in our organization. They are mature. They are adults. They’re smart. They have their hearts in the right place and they’re really trying to do, you know, the right job for the economy and for the country.

Are they the only people who could do that? No. I mean, you could come up with another agency that does it. And so, you know, the legislators get to decide that. I will say that there is value to the monetary policy aspect of what I do to have the supervisors also in my shop, which is you do get fresh insight as to what’s happening in the economy. Bankers do see the entire economy.

You get real insight into financial stability issues or risks because they’re very much front and center in that. So there’s a knock-on benefit. But I mean, again, I don’t get to decide, you know, who does bank regulation. I think there’s a role but, you know, the legislators get to decide.

LIPSKY: Now, the—of course, in the wake of the global financial crisis, first of all, there was a rethink of financial regulation in the U.S. and I think a lot of folks thought the starting point was this is an incredibly balkanized system and how do we simplify it, and the way they—the way Washington simplified it was creating a new institution that was supposed to make them all sit down together, the FSOC.

BARKIN: The FSOC.

LIPSKY: FSOC, and at least talk to each other. Not clear it’s had that big an effect. In your view, is it still worthwhile to try to de-Balkanize and make the system more unified and consistent or have we just got to live with what we got?

BARKIN: I mean, obviously, we ought to be trying to improve the structures we’ve got as best we can.

I have not been party to the FSOC so I don’t know whether it’s a highly effective or not organization but I think the notion of, you know, getting the regulators to work together is a perfectly—is a very sound idea and, in fact, day to day at the banks that we regulate you will see their various regulators trying hard to work together to get that done. And there are even risks that go beyond the banks and it’d be helpful for somebody to look at the risks that go beyond the banks as well.

I mean, nonbanks are more than half of the—almost every lending class in the country, I think, except credit cards at this point, and so it would be very useful to have you know, broader oversight of that as well.

But, you know, whether that organization is the right one or not I don’t know.

LIPSKY: Mmm hmm. And at the time of the failure of Silicon Valley Bank there were, I guess, in essence, two questions raised. One, how did it get so far over the tips of its skis without somebody saying something, and there was a review at the Fed and they addressed that question. And, secondly, there was a lot of concern that this was not an isolated event but that it was the beginning of a wave of problems revolving around commercial real estate.

Looking back, was Silicon Valley handled all right from the Fed’s point of view and, secondly, why has this wave of worry about commercial real estate not proven to be the challenge that it was feared it might be?

BARKIN: Well, we should start by saying it’s three years later and we’re in a lot better shape than people thought would be three years ago so we should all knock on wood and thank for that.

So let’s start with Silicon Valley Bank. I want to—I mean, regulation plays its role but management also plays its role and so we should start with a bank that had a very high concentration in one sector that it turns out had the wherewithal to withdraw its funds very, very quickly.

I think the big lesson to me of Silicon Valley was not commercial real estate. I don’t think that was a big part of the story. I think the big part of the story was that there’s a whole set of deposits that people had thought were very stable—uninsured corporate deposits—that it turns out are actually not very stable at all. So sometimes you learn those kind of things.

I thought the most interesting fact in that whole period was that Washington Mutual, which was a big bankruptcy back in the ’09 timeframe—’08-’09 timeframe—it took, I think, like, two weeks for this percentage of assets to go out at Silicon Valley. It went out in two hours. And so, you know, it’s a different world today than it was then and that is important for regulators and everybody else.

The Fed did do a report on the regulatory side. I thought it was a fair-minded report. I thought it actually described well the institution that I’m part of, which is that you had, you know, well-meaning supervisors who had some issues but maybe spent an extra step or two or three crossing all the Ts and getting all the approvals and checking it up and didn’t probably move with the agility that you would like. So I think that’s something.

In the aftermath of that there was then a lot of concern about the banking system. You guys are all familiar with all of the little matrices that were drawn—you know, if you have uninsured deposits greater than this and commercial real estate exposure greater than Y then you must be about to go bankrupt. You know, all those things happened, and it hasn’t happened for the most part and that’s been reassuring.

I do think the actions taken by the Fed and the FDIC over the weekend of Silicon Valley were hugely useful, including the BTFP. So from a response standpoint I would give high marks for that.

And then on the commercial real estate side, I mean, there’s no question that there is still—and when you say commercial real estate it’s not retail. It’s not industrial. It’s certainly not data centers. It’s, largely, not multi-family. It’s office, and it’s really not office everywhere because suburban office it’s fine.

It’s downtown B&C office that is the issue. There’s no question that there’s a lot of surplus B&C quality downtown office space that’s in trouble. The question of why that hasn’t hit the banking system so far I think has been a lot less equity—I’m sorry, a lot more equity in those ventures than used to be in those ventures, which means the losses haven’t been, you know, quite as high. I think a lot less concentration in the biggest banks in that sector.

You know, this is not—commercial real estate is not an unknown risk. It’s been stress tested against ever since we started the stress test, and so you just haven’t had that concentrated exposure at the biggest institutions, luckily.

But I always knock on wood on that because there’s some amount of the commercial real estate write downs that are absolutely still to come and, you know, our supervisors every day are spending time trying to make sure that we don’t have banks that are overly exposed to that.

LIPSKY: So we’re OK, we hope.

BARKIN: Our supervisors work every day to make sure that—(laughter)—the banks are not overly exposed to that.

LIPSKY: Would you like to make a comment on the rapid growth of private credit and private equity in terms of systemic stability?

BARKIN: Well, I said earlier that, you know, half of credit is outside of the banking system and that’s true for commercial credit.

The theory of private credit, which I have no reason to suggest isn’t accurate, is—the systemic risk is much lower because you’ve got equity holders, not, you know, banks that are subject to runs.

The loss ratios are lower because you have good underwriters, and by the way, if you go back to ’08 and ’09 the underwriting didn’t have issues and so what’s the problem. But I think it’s just when everyone tells me what’s the problem I get worried. (Laughter.)

I mean, maybe the underwriting is always going to be good. Maybe it’s not. Maybe there are no knock-on issues. But, you know, you would have said that about long-term capital in 1998, too.

So, I mean, I think you can never declare anything perfect. You just have to watch for compounding leverage and you need to watch for over optimism, if I could put it that way.

LIPSKY: Do we have enough data in this area or is there more needed?

BARKIN: I don’t believe the Fed has enough data on it. We don’t regulate this. We’re trying our best to get whatever information we can on it.

I think it would be a good segment to have more data. But, I mean, making the argument for regulation is basically—you know, we need more data is a hard argument to make. So—

LIPSKY: Great. Thanks.

Shifting gears again, what role should international financial standards play in terms of U.S. financial regulation and supervision?

BARKIN: Well, so we have great banks. The rest of the world has great banks. Most of our biggest banks and all of the international banks are competing internationally so you would like to have a level playing field, and I think, you know, it’s not that helpful to be out competing with banks that have very different standards than ours, and vice versa.

So I think there is value to a level playing field to the extent you can create it.

LIPSKY: Does that mean that if decisions on how this should happen are taken that are disjoint(ed) from the U.S. that that should be prescriptive for a change in the U.S. system?

BARKIN: No. I mean, we have the ability and the right to make our own regulations but I think we should be thinking about how does this position our banking system in an international marketplace while we’re making those decisions.

LIPSKY: Very good.

One more structural question. There have been a lot of change in payments technologies in the last few years, like, astonishing and, perhaps, more to come. The Fed has a big role that—and a lot of people probably don’t even know about in the payment system.

Has the technological—the changes and advances meant that, perhaps, the Fed could have a smaller role and shift more to the private sector or are things just fine as they are? Or would you expect change?

BARKIN: So most of you probably know this but the Fed operates—we do—we actually distribute cash. We do the last mile of check processing to the extent there still is any. We run the ACH system—the wire transfer system—and there’s a new instant payment system called FedNow. So those are payment rails that the Fed operates.

In every one of those payment rails other than cash there is the private sector, and so CHIPS and wire, roughly, fifty-fifty market share. The Clearing House has a product in ACH, roughly, fifty-fifty market share. So you’ve got the private sector working in those.

So, you know, in theory you could have the private sector doing all of those. I think that’s an argument sometimes you make.

What’s the case for having the Fed involved at all? I guess two things I’d talk about. One is resiliency. These are natural monopolies, if you think about it in the economy, and so having a couple of operators is useful if you think there’s any risk that any of these rails could go down, and there is risk that any of these rails could go down. So I think there is value to having multiple operators structurally.

Second is the folks who run the competing, if I could call it that, payments vehicles are consortiums of the biggest banks, and the smallest banks are very assertive that they don’t want to, you know, have a—they don’t like technology providers in general and they’d like this technology provider better.

So that’s why you’re in there. It’s all statutory reasons why we’re in there, and we’re governed by a whole set of rules called the Monetary Control Act which says, you know, we can’t make a profit. I mean, there’s all sorts of constraints on what we do, and I think it’s worked pretty well.

And if you, you know, think of times like getting the stimulus payments out in 2020 the fact that, you know, we could work with the Treasury, which is our client, to get that money into the ACH rails and into people’s as quickly and as seamlessly as we were able to I think is just a helpful part of what we do.

LIPSKY: Mmm hmm. And then the obvious add-on, some of your central bank cohorts around the world seem intent on developing central bank digital currencies. What’s your view about what the Fed role should be and is that relevant for the U.S.?

BARKIN: Well, there was an executive order saying we wouldn’t be investing in a digital currency so I think the answer is we’re not investing in a digital currency in line with that. You know, more broadly, I think the question of digital currency—a central bank digital currency comes down to the question of what problem are you trying to solve.

We have a digital currency. It’s called the dollar. I mean, I have $50 in my pocket and I have a lot more in the bank and I pay all my bills online and my paycheck comes online and, you know, I barely use any of the cash.

And so if you want a different digital currency that’s not the dollar digital currency you have to ask yourself why. Internationally there are lots of reasons why people would like to unhook from the dollar and the sanctions regimes are the most obvious example of that. But domestically it’s not clear to me why you want to unhook from a currency that is backed by the federal government.

LIPSKY: Easy enough. Well, then let me—before we open it up, let me toss you a softball.

BARKIN: I’ve been waiting for one.

LIPSKY: (Laughs.) Why is it important for the Fed to be independent? (Laughter.)

BARKIN: Well, I mean, I was teasing earlier when I said we don’t do that much. We kind of raise rates or lower rates.

But if you think about how do you fight inflation we all know that part of that story is you raise rates that quiets demand. You know, when you quiet demand that brings prices back down. It’s sort of basic stuff.

You take a little short-term pain for some long-term gain. That’s not an electoral winning value proposition and so, you know, the world of politics does not really like short-term pain for long-term gain.

And so this country and, really, every developed country in the world has decided that that’s best handled by an independent central bank who can make those decisions on behalf of the economy and the people who participate in the economy.

There have been a lot of studies done, and I think pretty good studies, that suggest that economic performance is far higher when you have an independent central bank and if you don’t believe me just look at Turkey, which, you know, three years ago decided that what they wanted to do was to lower rates in the face of high inflation, and if you don’t like 2 ½ percent inflation you really wouldn’t like 44 percent inflation, which is what they have in Turkey.

LIPSKY: Indeed. Now, and then the follow-on to that, when you hear folks in Washington say that the Fed needs to be audited does that sound like—is it necessary? Isn’t the Fed—aren’t the Fed books audited anyway and you view that as a threat to independence?

BARKIN: Yeah. I mean, when you say you want to audit the Fed what are you asking? We have KPMG as our auditor and they—if you’d like to see the audited financials, I mean, you know, and you’re having trouble sleeping, you know, that’s great.

So we’re audited. So you just say what is it that you then want to audit and I guess that question would be are you auditing stuff that’s relevant to independence, and that’s the risk.

LIPSKY: Very good.

All right. Now it’s time for you guys, your turn to ask questions including those online. So please indicate—there will be a microphone coming, and please state your name and affiliation and ask your question. And just a reminder that this meeting is on the record.

So we’ll start right here.

Q: Thank you very much and thank you for all your comments. Rebecca Patterson, Florida girl and senior fellow here at Council on Foreign Relations.

I wanted to pick up a little bit on how payment systems are evolving and specifically stay on crypto and digital assets.

So we have legislation going through the Hill right now on stablecoins. Certainly, this is a government very supportive of broadening that ecosystem, increasing adoption. As these coins get more intertwined with traditional finance, different firms are launching them, et cetera, it seems like there’s more potential for systemic risk.

How is the Fed staying on top of the technology and is the fact that you’re no longer allowed, really, to play in the central bank digital currency space is that hurting you in these efforts to understand where digital assets are going and what it could mean for financial stability?

Thank you.

BARKIN: No. I mean, you know, obviously, the risk is that you have something called a stablecoin but it’s not actually all that stable, and if you go back a couple years there were some—you know, a couple of the proprietors were exposed as not having quite the stability of assets behind the stablecoins as they were sort of proposing.

And so, you know, I hope and expect there will be a regulatory regime that will, you know, make sure that something called a stablecoin is, in fact, stable. You know, the risk—the financial stability risk looks a lot like the mutual fund financial stability risk, which is people don’t really—with a money market fund people don’t really think that you can break a dollar but you actually could and so how do you manage an instrument.

And, you know, there have been some efforts over the years to try to make sure that you’ve got the right kind of backstop to the money markets and I hope and expect we’ll have the same kind of thing with stablecoin.

We are absolutely monitoring it in the way you would hope and expect and there’s nothing about developing a central bank digital currency which, by the way, we had already put out a paper saying we weren’t going to do it without legislation. So we weren’t planning to do it anyway that inhibits our ability to track that.

LIPSKY: Thanks. Over here. Right here.

Q: Thank you very much. Rory MacFarquhar from Gemsstock.

Can you please discuss how you think about tomorrow? We’ve been led to believe that Liberation Day is going to be a lot larger than what we saw in 2018 and 2019, and in particular how you think about the two sides of your mandate, whether, you know, hypothetically speaking, in a year’s time you’re more likely to be cutting into weakness in the economy or hiking into higher inflation.

BARKIN: So I don’t know what’s coming tomorrow. I don’t suspect you do either, and I think the most important—first thought I have for tomorrow is let’s see how it plays out because so far the tariffs that have been announced have, you know, been revised.

And so, you know, I personally plan to give it some time to see if we can’t figure out what a stable policy regime is and then we can start thinking more about policy. But we’ll see what we learn tomorrow and in the days that follow.

In terms of where the economy goes, you know, I guess I’d just take you back to this question of, you know, what’s going to happen when tariffs are imposed. So this isn’t 2019. In 2019 tariffs were imposed after ten years of no inflation with a bunch of suppliers who didn’t think they had pricing power and a bunch of customers who didn’t know what inflation was, and what you saw was very modest inflation at most.

A little bit of issues in terms of investor sentiment. Hiring stayed steady in 2019. Consumer spending stayed steady. It was not a big issue in the context of the entire economy.

Now, I then flash you forward to 2022. Not tariffs this time. This is supply shocks. Hits the entire economy. Suppliers just knew they had to do something to pass it on and they did, and then it met a bunch of consumers who had a lot of money in their pocket because of excess savings from the pandemic and stimulus, you know, checks. And so all that went through and it turned into inflation.

And so I don’t think this is going to be 2018 or 2019. By the way, just the tariffs announced so far, if you include Mexico and Canada, are four times the increase as you saw the—in 2018.

I also don’t think it’s 2022 because you’ve got a bunch of consumers who are frustrated by high prices and have started to take action over the last year to trade down or to, you know, move to lower price outlets or whatever.

And so I think this is—you know, I’ve been sort of trying to be funny and calling it a cage match but it’s sort of a cage match between an emboldened supplier who really believes that they’ve got to pass on these tariffs and a frustrated consumer who really believes, I’m not paying those high prices anymore ,and where that lands is going to be very interesting to see.

Back to your mandate question. So, obviously, some amount of that will pass through into prices and so that will be inflationary, and maybe it’ll be short term. Maybe long term. We’ll see.

But I’m just as interested in what’s going to happen on the employment side because if you’re a company that raises prices the demand curve would suggest your volume is going to go down and if you’re a company that can’t raise prices then your margin goes down. In either case you’re going to start working on operational efficiencies and that means headcount.

And so I think you are going to see challenges on the inflation side. I also think you’re going to see challenges on the employment side and that, of course, as you suggested, creates challenges for us from the monetary policy side because business is a lot easier if you’re doing a framework in 2019 and unemployment is low and inflation is low. It’s harder if things move the other direction.

LIPSKY: Going to be interesting.

Over here.

Q: Thanks, John. Andrew Gundlach, CEO OF Bleichroeder.

You used a great phrase “compounding leverage” as a place to look for fermenting problems. I don’t know if you have had a chance to read the Brookings report called Treasury Market Dysfunction from last week, and it essentially focuses on the basis trade which is, you know, ninety to one leveraged across a few—OK.

Essentially, the paper—and I haven’t fully digested it—is that the Fed should have a(n) overt put. I guess it’s a version of the Gensler-Ken Griffin public spat over taxing or capitalizing these trades.

How should we view this from the outside? One side it’s about the cost of borrowing for the U.S. government. The other side is macro prudential risk. How are you thinking about it? How should we follow the debate?

BARKIN: Is this the paper that said we should create a facility that buys options?

Q: I don’t know what the technical way, but basically it goes to the COVID blowouts where the excess selling of basic treasuries on a ninety to one level basis caused all kinds of market dysfunction and it’s the dysfunction of the market that prevents monetary policy from working. That is the claim that you need to step in with a put as opposed to the ad hoc nature of it all.

BARKIN: Yeah. I don’t think I have any genius on that other than to say, I guess, two things. One is, obviously, we would like our financial markets to be operating smoothly and seamlessly without crisis. We don’t like Silicon Valley Bank crises. We don’t like COVID crises. We don’t like Lehman Brothers crises. We don’t like long-term capital management.

I mean, it would be lovely if we didn’t have these and I think there is something to the financial stability oversight that could be relevant in that, and to the extent you’ve got compounding leverage that is where I think most of the risk is.

I think it’s not easy to do financial stability oversight because what you’re doing is you’re trying to solve a problem you don’t yet have, and so those people who are the perpetrators of the problem don’t think they have a problem—that’s part of the definition—and a lot of the players in the economy don’t want more oversight and regulation in those spaces.

And so it’s a little bit of whack-a-mole and the moles aren’t putting their heads up all that often and so that’s a hard puzzle. But I do think that’s something. You do have a Fed backstop. Sometimes people ask me why even have a Fed, and you could talk about monetary policy but I guess I’d just remind you that in the eighty years between Andrew Jackson getting rid of the Second Bank of the U.S. and 1913 when the Fed was created, if you go through history it seems like every fifteen years there was the panic of—the panic of 1837, the panic of 1873. There was one in 1907. I’m missing two of them. But, you know, they were there because there was no backstop.

So it’s not—it’s not wrong to have a backstop. I think it’s good to have a backstop and not have it be JPMorgan, the man—(laughter)—I mean, as opposed to institution. But it would be great if we could find a way to intervene.

I do think it’s harder than it looks, you know, to actually get into that because, you know, you’ll have some type one and type two error and the type two errors no one’s going to be happy about.

LIPSKY: The lady right there and then, Niso, you’re next.

Q: Thank you. My name is Valerie Grant and I’m with Nuveen.

As an investor what I hear from corporate executives as it relates to technology and generative AI is that it will significantly reduce their cost structure over time. It’s really viewed as a cost-savings opportunity.

So my question is how does the Fed think about technological innovation and the adoption of generative AI but from the macroeconomic level, given its deflationary impact.

Thank you.

BARKIN: Yeah. So I guess the lens we look at is productivity. Productivity is good. It’s good for growing an economy.

Productivity is good for creating disinflationary impulses. Productivity does run the risk of having excess labor but, you know, we might have labor tight regardless. But—you know, but we look at it as productivity.

Now, you know, the challenges with technology and productivity is they always sound good and only sometimes do they hit productivity. And there’s the famous Solow quote from the late ’90s about computers saying, I can see it everywhere but in the productivity statistics.

And I think that is a risk, and productivity for this country in the ’80s and early ’90s was not that great. Then we had ten years of great productivity. Then we had about fifteen years of not great productivity growth, and in the last five years it looks like it’s come up again.

How much of that is AI I don’t know. I suspect not much so far, but I do think the biggest driver of the recent productivity we’ve seen is that three years ago nobody could find any workers, and if you can’t find any workers it kind of focuses the mind and you start thinking about different staffing formulas and automation and robotics and process changes that help you find productivity, and I think we’re seeing the benefits of that today.

Why is that relevant? Well, you know, the core workforce in this country is not going to grow at levels that are consistent with the past over the next ten years. I just think you can say that as clear as day.

Fertility is not the answer; the gestation period is too long. Immigration does not look like the answer in the current political environment and so—and bringing people off the sidelines is great but, you know, so I think we’re not going to have workforce growth, which means I do think businesses are going to have constant pressure on how do you get more productive so you can do more with fewer.

And when you face that what you do is you say, huh, what’s the new technology I could use that can make something happen, and AI will be right in front of people. Robotics is right in front of people. And so I do imagine you’re going to see a lot of investment.

You know, if you buy what I was saying earlier about the impact of tariffs on margins there’s another place where people are going to say, I’ve got to make this investment now. I’ve got to—you know, I can’t pass it on. I’ve got to get more productive.

And so—and I really believe with computer technology there was a little bit of the productivity lean in the mid-’90s that actually got people focused finally on, you know, capturing the productivity that was implicit in the technology.

So I think it’s a highly likely tool that people are going to be looking at over the next five to ten years and implementing and doing stuff with. But we’ll see.

LIPSKY: Yeah. Here I’ll interject there’s a student of Paul David—the late Paul David, the great theoretician of technology and productivity. Productivity always moves in waves, never in straight lines, and for good historical reasons.

And add on, having heard Jensen Huang of Nvidia speak a few months ago that we talk about AI. But as he puts it, the real change is that ten years from now computers are going to be so much more powerful than they are today that the computers will be expensive but computing will be, essentially, cost free, and think about what changes would that entail.

It’s sort of hard to envision but hard to think it’s not going to have an impact on productivity.

Niso?

Q: Thank you. Niso Abuaf, Pace University.

As you know, the Fed has been running negative P&L for quite some time because the interest it receives on its assets is less than what it pays out on reserves.

The question is when that happens does the Fed write itself an IOU which is, on the one hand, a deferred asset and there’s a liability? So what are the both short-term implications, kind of procedural implications, and what are the long-term macro implications of that scenario?

Thank you.

BARKIN: Yeah. So for those who aren’t close to it, when we bought a lot of bonds in 2010 and 2011 and 2012, when we bought a lot of bonds in the COVID crisis, you know, rates are pretty close to zero. You buy a lot of bonds when rates go back up those bonds go underwater.

So that’s why it’s a bookkeeping P&L and so, yes, it’s a deferred asset. It’s an IOU we write to ourself and we don’t think there’s any implication of it and, in fact, most forecasts are we’re about to break even in a year and then we’ll start, you know, remitting again a couple years after that.

LIPSKY: There are precedents of central banks operating with negative net worth for an extended period of time but that works—it seemed to have worked fine. Let’s hope it keeps working.

More questions? Oh, this means from the virtual world.

OPERATOR: First virtual question from Krishen Sud. Please accept the unmute button.

Q: Yes. Thank you for taking the question.

You know, you mentioned that there’s a lot of focus on the Fed decision. So just a practical question—is there any discussion of, perhaps, making the Fed decision after the market closes maybe at 4:30 and a press conference after the market so that, you know, the market has time to digest it? Because there’s often unusual volatility between, you know, 2:15 or 2:30 and 4:00 p.m. So why not just do that, which is what most companies do?

BARKIN: I’m sure that would make Jay happier. I can’t imagine, you know, what it feels like to walk off and see the market up 400 or down 400 after you speak. But I’m not sure. I’ll pass that idea on. I haven’t heard that.

LIPSKY: I suppose when—you wouldn’t want to give foreign institutions first crack at trading on Fed news, would you?

BARKIN: I really haven’t thought about the timing of the press conferences. (Laughter.)

LIPSKY: OK.

BARKIN: I will say one other thing to your question on productivity that just came to me, which is the other thing I think that’s going to be really interesting about the workforce and AI is the places where we’re most likely to need people or going to be least, I’d say, susceptible to AI are a lot of these in-person care jobs—you know, think elder care.

And so you may well have an economy over here that is not a very productive part of the economy, you know, according to the stats that is growing and not really helped by AI and then you’ve got this thing over here—you know, think of administrators and it’s very much more productive.

And so it’ll be interesting because, you know, the growth in the economy may be in the parts that are least susceptible and that’ll be something worth thinking about, too.

LIPSKY: Over here.

Q: Just to return to the issue of central bank independence, the administration has removed the heads of independent agencies and that process is going through the courts.

If it turns out that the administration successfully asserts the right to remove the heads of independent agencies does that in itself mean the end of Fed independence because that implies that at any moment in time if he so chose the president could remove the chairman of the Fed?

BARKIN: I think you’re well outside of my legal. (Laughs.) I did train as a lawyer but I never practiced so I don’t know the answer on that and I’m not even sure I’m dying to answer the question. So—(laughter).

LIPSKY: Right here.

Q: Good morning. John Tyson with Tyson Foods.

Earlier you were talking about the two-way conversation between monetary policymakers and the private sector and how what’s most important is the stability and consistency and feedback from monetary policymakers to the private sector.

I’m curious, for you or for other officials what are the forums and mechanisms that you take kind of anecdotal feedback from the private sector? So, you know, one part of the two-way conversation is the market reaction but is it just your former clients from McKinsey and your informal network?

How do you do that and could you give some examples?

BARKIN: I’m available after this meeting to find out how tariffs are going to affect you guys because you’re right in the middle of it.

So we actually—we’re very structured on it. I walk out of every FOMC meeting and say, OK, I think the questions for the next six weeks are X. Let’s say the question is tariffs and how they’re going to affect behavior.

So we actually go through the companies in our district and say who do we want to talk to here that would have something to say. Lowe’s in Charlotte, obviously, has a lot to say about what the impact is of tariffs coming from China.

We’ve talked to four or five different groups of farmers in eastern North Carolina and eastern Virginia to talk about how they see the impact of tariffs. Government reductions are a big question in my district, which is Maryland down through South Carolina, and so we’ve had roundtables with government contractors.

And so we actually run a pretty disciplined process of what are the questions we’re trying to answer and how do we interact with it. You know, I personally—and this is probably my background from before—you know, I think you can get real insights from these conversations that are different than just cocktail party conversations.

You have to understand where the business is coming from, what segment they’re playing in, what customers they’re selling to, how their businesses work. I push hard as best I can into how are you going to react to this. You know, we talked to an apparel manufacturer in Mexico to talk about how are they going to react if the 25 percent tariffs stay and what you hear is a lot of words like frozen, paralyzed—let’s see how it plays out, because right now the businesses are trying to sort that out.

We then run a formal process every FOMC meeting, and I’ve got a team that does this with me and multiplies, you know, what I do but—and so I’ll probably—if you talk about round tables and individuals I probably talk to a hundred and fifty different businesses every cycle about what’s happening. I try to add it up in my mind and then my team is multiplying that.

And when we think about the next FOMC meeting we stop and we say, OK, let’s go through all the data. That’s one meeting. But we have another meeting where we say, let’s go through all about what we’re hearing from our contacts, and we get a ton of insight from that and I try hard to provide something different and maybe distinctive, you know, on that dimension.

LIPSKY: In fact, I would presume that that’s today, perhaps, the most important justification for district—having so many district Feds that there’s still enough differentiation in the economies that you want to make sure that they’re reflected accurately and making monetary policy for the entire economy.

BARKIN: Well, I mean, it’s certainly confusing now but I think it’s always confusing, and I think being close to the customer is an important part of running any business, and the notion that a bunch of folks who sit in D.C., you know, understand fully what’s happening in the markets just doesn’t strike me as that logical.

And the beauty of the Federal Reserve system design in 1913 was you had the D.C. part and you had the local part, and I do believe to help make the local part vibrant and as part of the conversations I have with people in the district and legislators, you know, I’m talking about how much I’m out there because I do think there’s real value to listening to what people are experiencing in the economy.

You know, during COVID I was in Bristol, Tennessee. This would have been May 1 of 2020. In May 1 of 2020 Tennessee reopened but Virginia hadn’t reopened, and the malls on the Tennessee side of the border were packed.

And so you’re getting all this stuff and, you know, how do you know how much repressed or suppressed spending there was? Well, that was your first indicator, May 1 of 2020, that there was that much dry powder that was going to go into the economy and that’s something, you know, we started to talk about right after that because you actually learn, you know, what’s happening when you’re out there.

LIPSKY: And I assume that your insights won’t be the same as your counterpart in San Francisco and Chicago, et cetera.

BARKIN: I mean, it’s even more gratifying if they are but they’re not always the same. They’re not always the same.

And you can imagine, if you’re in Chicago you’re heavily indexed to the auto industry right now and so they’re probably spending a lot of time there, and in San Francisco in the tech industry and they’re probably spending time there and, you know, nobody’s got the D.C. footprint that we have so we’re spending a lot of time on government contractors and how are they handling it.

So, yeah, I mean, I think back to the sector point, I mean, to get the economy you have to add it up by sectors, and you can’t just talk to five people and say the economy’s in good shape because they might be in the good sectors.

LIPSKY: Mmm hmm.

Yes, here.

Q: Alexandra Starr with International Crisis Group.

You spoke earlier about the care economy and how demand is going to rise in that sector, and you also touched upon immigration and the fact that in this political moment it doesn’t seem like we’re going to be accepting large numbers of people. We might actually end up expelling 500,000 this year.

I was wondering if you could talk about, or if you don’t feel comfortable presenting your own opinion, what you’ve been hearing from these businesses in the Southeast about how this migration crackdown might affect them.

BARKIN: Yeah. So maybe some numbers first.

You know, workforce growth, which has something to do with demographics, something to do with fertility, something to do with participation, and something to do with immigration, was about .7 percent during the 2010s and that was about .3 (percent) natural growth and .4 (percent) immigration.

During the—at the peak, 2023, of the prior administration it was about 1 percent and that was about .15 (percent) natural growth and about .85 (percent) immigration.

Most estimates—and no one knows exactly what the numbers are going to look like—you know, would suggest for ’25 and ’26 we’re looking at more like .3 percent growth, .1 (percent) natural and .2 (percent) immigration, and there’s a bid-ask spread on those numbers, just to be clear.

But if that’s the case you’re going to have workforce growth that’s, roughly, half the 2010s and, roughly, a third of 2023. So that’s just some baseline numbers.

If you want to grow the economy you grow through workforce growth and you grow through productivity. If you want to add those two numbers together that’s not a bad way to think about it, and so if you’re at .3 (percent) for workforce growth and you have, you know, 1.6 (percent) or 1.7 (percent) or 1.8 (percent) for productivity you’re talking about a 2 percent growth rate. If the productivity number is lower or higher, you know, that would move.

So that’s sort of where we sit, and so you would expect to hear a lot of tightness in the labor market from that. I have to say I’m not hearing it yet. When you talk to employers what you’re hearing right now is the labor market’s fine. It’s in balance. They don’t say there’s a thousand job seekers for every job but they also don’t say, you know, they’re really very tight.

Part of that is because very tight to them feels like 2022, and so if you’ve been through that near-death experience today just looks like normal. Part of it is that employers across the economy have not been hiring at very high rates. We’ll get the JOLTS data in about a minute—(laughs)—so I may be proven wrong in a second, but I can still say it.

And so, you know, because of this low hiring environment, which means that there are people out there looking for jobs. The places where it’s tightest are still skilled trades. So, you know, and I think of that broadly—nurses, childcare workers, but also auto technicians and mechanics and welders and carpenters and those sorts of folks. So those are the places where you’re still hearing tightness.

Now, people are concerned about it. I mean, there are a lot of people who employ H-1B or H-2B visa holders who are worried about what will happen. But I’d say it’s—and definitely in the care economy you’ll talk to people who are worried about where it’s going to happen but—construction would be another place.

But I’d say it’s still more worried about what’s going to happen than it is the actual and I suspect that’s because some of the numbers you were talking about have not yet actually happened, you know, in the economy broadly.

But I don’t know that. That’s what I’m hearing.

LIPSKY: Mmm hmm. One final question.

Q: Super quick, Tom. Have you heard anywhere that the trade war leads to foreign bans or limits on investment into either U.S. securities, less so capital and PP&E but more securities? I’m personally not concerned about it. I think they would be hurting themselves. But this is economic war, if you will, and so behaviors change.

BARKIN: I certainly haven’t heard about a ban. You know, you know because you look at the numbers that there’s been some movement in terms of foreign holding of U.S. treasuries. And, by the way, if we reduce the trade deficit we will presumably reduce the amount of U.S. dollars that are in foreign governments that are then recycled back.

So I think that’s a risk to keep an eye on. And I have wondered, you know, as the long-term rates went up in the fall even though we were taking short-term rates down how much of that was supply and demand and, you know, we have a lot of supply and maybe there’s a little bit less demand. But we’ll see where it goes.

LIPSKY: One final comment on the labor sector that I find doesn’t get remarks so much, although we’re all aware of it, and that is the adoption of work from home.

BARKIN: Yeah.

LIPSKY: If you believe Peter Bloom with Stanford’s figures, prior to COVID about 6 percent of work effort in the U.S. was on a work from home basis. Today, it’s stabilized at about 23 percent, which is a fantastic change in the structure of the labor force how work gets done in a very short span of time.

We’ll see if that’s sustained. Then, of course, that complicates the understanding of productivity and measurement, et cetera. It’s quite a challenge.

BARKIN: When you talk about workforce growth there’s one really promising piece of the numbers, which is participation of women in the workforce is now at its all-time high in the U.S. If you dig into where, it’s women with a college degree and a kid under five. That’s actually the segment that’s really driving that increase in workforce growth.

And, you know, I guess I couldn’t prove this but it would make perfect sense to me that that has something to do with either the existence of hybrid or the potential of hybrid as people think about it. And, you know, more people in the workforce, as I suggested earlier, is good for the economy.

LIPSKY: And that stands to reason. The earlier big increase in female labor force participation was a move to more flexible work hours and less than full time work. So increased flexibility tends to—will have an impact on that.

Anyway, the JOLTS data is probably out but so allow me to thank you all for joining today’s meeting, to thank President Barkin for speaking with us. I think we’re all going to go away with this quiet feeling inside that we’re comforted that the Fed seems to be able to attract such high-level leadership, and thank you very much for your service and I think we all appreciate it.

BARKIN: Thank you. Great to be with you. (Applause.)

(END)

This is an uncorrected transcript.