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Exclusive: Richmond Fed President Tom Barkin talks inflation, labor and the economy on Yahoo! Finance

In a Yahoo! Finance exclusive, Richmond Fed President Tom Barkin chats with Brian Cheung taking on on the U.S. labor shortage, rising inflation, and the Fed's new ethics rules.

Video Transcript

ADAM SHAPIRO: We told you that Brian Cheung was going to be interviewing the Richmond Federal Reserve bank president in this hour. And we want to get to that now. Brian Cheung is joining us with a special guest. Brian.

BRIAN CHEUNG: Thanks, Adam. Well, joining us here in an exclusive interview on Yahoo Finance Live is the Federal Reserve Bank of Richmond president Tom Barkin. President Barkin, it's great to have you on the show this afternoon. Just kind of actually wanted to start off with the breaking news that we had gotten about that infrastructure bill with regards to where we are in this economic recovery. Just kind of wondering if the passage of that infrastructure bill moves the needle and where you expect economic growth to go.

TOM BARKIN: Well, most of this bill is going to be spent over multiple years. And so, I don't think this is a near term stimulant on the economy. I do think this is going to increase pressure on infrastructure workers. And so I am going to want to see how we're going to keep building out the infrastructure workforce. That's a workforce that's, as you know, already quite tight

BRIAN CHEUNG: So President Barkin, a lot of this is kind of obviously coming at a time where a lot of Americans are worried about inflation. And some people are wondering, well, if this type of fiscal spending is happening, is that going to further inflation? Now when we talk about the prints that we've gotten so far, obviously, that hot CPI print showing the fastest pace on a year over year basis since 1990, is what we're seeing right now transitory in your view?

TOM BARKIN: Well, the last CPI report, as you know, was pretty significant and pretty broad. And so we'll see how long this lasts. But I do anticipate these supply chain issues are going to last well into next year. And I'm watching very closely the labor side. There's a lot of pressure right now on jobs, as you know, participation, wages. And that's the kind of thing that makes inflation more longer term. And so that's really what I'm watching, is the labor market.

BRIAN CHEUNG: And I want to get back onto the labor market in a little bit. But I want to stay on the theme of inflation, because it's also weighing on consumer sentiment. We saw that from the University of Michigan's release last week. Do you feel like there's a risk of an unanchoring of inflation expectations from the perspective of the US consumer? Because it's clear that people are talking about this at the dinner table now. They're noticing it at the stores. When you talk to people in your district in Richmond or small businesses, how important is that discussion as you try to think about whether or not there is the risk of an unmooring of inflation expectations?

TOM BARKIN: Well, there's always that risk, but I've taken some comfort out of the combination of what you hear from those consumer surveys that seem to suggest medium to long term inflation is still within most norms. I've taken some comfort from the markets, which seem to have medium to long-term expectations still pretty stable. And I've taken some comfort from when I talk to businesses because even today, as they see higher costs that they're pushing into prices, they're not talking about this being something that's going to last year over year over year, which is really what persistent inflation is.

BRIAN CHEUNG: Well, and that's interesting you bring up businesses. And you have experience kind of consulting for businesses as well. Margins right now, right, are kind of the big driver when it comes to price increases. These are the executives who have the ability to put into place passing on of costs if they're facing higher material costs or higher labor costs. So when you talk about the idea of transitory-- this obviously appears to be lasting longer than many policymakers thought-- do you see what we're seeing in earnings this quarter as supportive of the transitory or supportive of the persistent argument on inflation?

TOM BARKIN: Well, I just don't think what you're seeing this quarter has all that much relevance for what you're going to see a year from now. You have supply chain outages, which means that manufacturers, businesses, are more interested in getting availability than they are in squeezing on costs. So they're more receptive to price increases. You have consumers that have a lot of money in their pocket and are free to spend by combination of the vaccine and opening of the economy. And so they're probably less willing to walk away for a price increase than otherwise seen. We've got to get to the other side of this before you really know whether these things are persistent or not.

BRIAN CHEUNG: Well, and I guess, that that kind of gets at the question of whether or not the inflationary pressures that we're seeing right now are coming from demand or coming from supply. And we know the anecdotes about the supply side of things with the bottlenecks and also labor shortages and whatnot. But what are you seeing on the demand side of things? Because there's a question about whether or not the fiscal stimulus that had been put in place during the depths of the pandemic may have changed the behavior for the propensity of Americans to spend. Is that something that you're seeing in the data? Or are things still really noisy and difficult to figure out right now?

TOM BARKIN: Well, there's no doubt in my mind that demand is quite strong today. On the consumer side and the business investment side, on the government spending side, demand is quite strong. And everyone I talked to says that. You still have about $2 and 1/2 trillion in excess savings in people's pockets that hasn't been spent. Now, what you're not seeing is people, in total, you're not seeing the economy spend into that savings. So the savings rate isn't below where it was before. And so you still got this $2.5, $2.7 trillion in excess that I think is supporting consumer spending.

BRIAN CHEUNG: And so kind of to bridge back to Fed policy here, you're in the midst of tapering your program right now. That was announced at the beginning of this month. It's going to start this month. I guess the idea is that the pacing would allow you to wrap up all asset purchases by the middle of next year. How do you think about the optionality on raising rates, if inflation does prove to be a bit more sticky than policymakers are seeing right now?

TOM BARKIN: Well, I like what Jay said at his last press conference, which is, we'll be patient, but we're not going to hesitate. And so, if the need is there, we'll do what we have to do. But I personally think it's very helpful for us to have a few more months to evaluate, is inflation going to come back to more normal levels? Is the labor market going to open up, as people spend through some of this savings, perhaps, after Christmas, come back in the workforce as COVID declines? And so, I think it's helpful to have some time to see where reality is in this economy. And if the need to act is there, we'll do what we need to do.

BRIAN CHEUNG: So let's go back to labor market because that's a big part of this equation as well, right? The Federal Reserve has been very clear that substantial further progress is not the test for raising rates. It would have to be really kind of closing the shortfalls for maximum employment. What is maximum employment in the dynamic of this labor market? Has there been any sort of permanent change to it that would imply you can't get to the same levels or numbers as you had pre-pandemic? Or is there some good faith that you can get everyone who is currently out of the labor market back into the labor force?

TOM BARKIN: I think that's the core question. I mean, what we've seen-- we know that underlying what's happening to the labor force is a declining trend in labor because of demographics. Fertility is down, people are aging, immigration is down. And so you've just got a smaller base. If you go back to the last upturn, what you saw was a significant excess of workforce participation above that trend. We've now come back down to the trend.

And the question for me is, was the aberration-- is the aberration today, and people will get back to work? Or was the aberration at the end of the last upturn or somewhere in between? And that's what we're going to get a lot more news on. Importantly, as we get COVID fully behind us, because I'm certainly one of those people who thought in September, we would-- schools would be open, childcare would be open, COVID would be down. Unemployment insurance sort of expired. We'd have gotten more people in the workforce, and we just didn't see that. And so now, give it a few more months. If we can get COVID behind us, then we'll see.

BRIAN CHEUNG: Now, at the same time, there's been some discussion, though, that some-- those particularly over 55 have retired for good. They're not coming back. There's also just kind of lingering questions about whether or not some women and those that have been disproportionately affected by the pandemic will be on the sidelines forever. So how helpful are looking at-- is looking at other types of data sources, when I talk about, for example, labor turnover from the JOLTS survey, which showed, last week, a record amount of quits in the month of September. Are you gleaning anything from those type of data releases and those pulses about where maximum employment might be?

TOM BARKIN: Well, I think of the labor market as having three different pieces to it. There's a piece to it which is the skilled trades. Think carpentry, manufacturing, even nursing. They were short before the downturn. Demand has spiked in all of those sectors. And they're short today. And the issue there isn't demand. The issue there is getting more people interested in those trades and getting trained and certified and licensed into that. So that's one whole set of issues.

There's a second issue in the frontline labor. And that's really where the quits is elevated. And you can imagine why. If you were working for $10 or $11 or $12 at a fast food place and you could get a job for $15 at Amazon, why wouldn't you go there? And a lot of people have left those sectors perhaps because they got laid off and found other jobs, perhaps because they don't want to work in a mask, perhaps because they're still nervous about COVID. You know, who knows why? But there's a lot fewer workers interested in those segments. And that's why you're seeing strong quits in those sectors.

The sector we haven't really seen as much quits on yet, but I still think there's more to come, is in the professional class, where you're starting to see some turnover. And of course, people are very busy, working hard. Maybe they're reassessing their lives. And so I think you will see more turnover to come in those sectors.

BRIAN CHEUNG: Now, you've talked a lot about this idea of the Great Resignation. And you kind just touched on the wages aspect of that. When you look at the BLS reports on a monthly basis, how important are wages? Because a lot of people are reading that within the context of this is us trying to draw, based on where labor costs are, whether or not those inflationary pressures will be persistent, because if you keep them on payroll, that's going to be likely more of a persistent increase than a temporary increase.

But at the same time, the Federal Reserve has also made it clear that it's not just wages that are important for getting people back to work. It's making sure that you actually get the people who don't have a job back into a job. So how important is the wage number when those reports come out?

TOM BARKIN: Well, I'm looking at wages as a sign of how tight it is. And again, I look at it across those three sectors. So I try to look hard at the leisure and hospitality jobs as an example for one sector or the manufacturing jobs as an example for the other, and see what's happening. And then I think importantly, participation is absolutely critical.

And I think you can just make the case that right now, if you're not getting more people in the workforce, businesses are trading one another's workers. And they're bidding in an auction for each other's workers. I was with a hospital, talking about traveling nurses the other day. And it just sounds like the industry has moved toward everyone's traveling, even if they're traveling within a metro area, because they're all just bidding for one another's nurses. And I think until you get more participation in the workforce, that's the dynamic we're going to have.

BRIAN CHEUNG: Yeah, and nursing field is one place where we've heard so many anecdotes of people feeling burnt out and then quitting and actually leaving the industry entirely. We'll save that for another time. But I want to ask about you talk about just kind of different industries. What about different types of demographics when you talk about rural versus urban? Your district covers the entirety of North and South Carolina. Are you seeing any sort of difference in the economic recovery in those regions?

TOM BARKIN: Well, it all depends on where you sit, but I'd say there's real opportunity for smaller towns that have trouble getting workers. Think of a two-career couple. Now one of them can work remote. You might actually be able to get them to move to that town. Now, not every town's going to benefit from that. The ones that are going to benefit are ones that have amenities, ones that have broadband, ones that have-- manufacturing towns are benefiting because of what's happening in those markets.

And I think all of the stimulus money has a real opportunity for small towns. There's $65 billion allocated to broadband in this infrastructure bill. If that can get deployed into these small towns, you really can set them up with a much better, more attractive offer for workers. So I think the opportunity is there. But it's a competition. And it's a competition among these small towns. And those that seem to have the best amenities, the best product, I think, are in advantage to that competition.

BRIAN CHEUNG: A bigger picture question here, a lot of discussion about stagflation. Some people thinking that we're in a stagflationary environment, which would imply kind of a 1970s era period of low growth, but high inflation. Is that something that you're seeing from your vantage point at the Richmond Fed?

TOM BARKIN: Not at all. In fact, as I said, I think demand is extremely strong. So we don't have a situation of slow growth. We have a situation of very strong growth, frankly, growth that is overwhelming the capacity of both labor and supplies of the economy to handle it.

BRIAN CHEUNG: But is that something that you're hearing from kind of, I guess, people in your district and the workers and the hiring managers in your district about these type of economic concerns? Because it just feels like over the past few months, there's been kind of this heightened sensitivity to the macro picture at hand here that maybe it's overheating at a rate that is not sustainable.

TOM BARKIN: Well, I think it's fair to say there's a lot more attention. And you mentioned the sentiment survey, the Michigan survey earlier. You know, there's a funny situation. You'll talk to a small company, and they'll say, gosh, my costs are up, and I can't find any workers. And we had the best year ever. And I think there's a lot of that going on now, which is, they're having their best year ever, but they're just nervous, concerned, about some of these things and the inflationary pressures that they're seeing. It's a dichotomy, but it's very real.

BRIAN CHEUNG: Right, and lastly here, I want to ask about obviously the big headlines that have been swirling around the Federal Reserve over the past few weeks. There's an ethics review that was done by the Fed. The chairman, Jay Powell, did announce some changes that happened after two of your colleagues in Boston and Dallas stepped down after some of the trading that was done over the course of 2020. I'm just wondering how you have personally approached your financial interest over the course of this pandemic, but also through the recovery. And do you feel like these tightened ethics guidelines are really doing enough to make sure that you can maintain the credibility of the central bank?

TOM BARKIN: Well, we had a set of policies that, I'm told, served us well for decades. I think in the context of all the new stuff that we did during the pandemic, it's entirely appropriate to take a fresh look at it. And I think what the chairs put forward is very reasonable, and I certainly plan to follow every bit of it.

BRIAN CHEUNG: All right, Reserve Bank of Richmond, Tom Barkin, in a wide ranging conversation here on Yahoo Finance. Thanks so much for joining us on this Monday. Have a great week.

TOM BARKIN: Thanks, Brian.

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