Fed's Barkin: I try not to pay too much attention to the stock market
Thomas Barkin, the president of the Federal Reserve Bank of Richmond, spoke with Axios recently about the outlook for interest rates, a volatile stock market, and why people hate inflation so much.
- Lightly edited excerpts of the conversation, which took place at the bank's headquarters in Richmond, Virginia on May 12, are below.
On whether the Fed might raise interest rates by 0.75 percentage points at a time, instead of 0.5 points as it did this month:
- "Jay [Powell, the Fed chair] laid out in his press conference what seemed to me like a pretty rational potential path forward. And I think we'll just have to see where it goes. The things I focus on, first and foremost, are the combination of demand and inflation."
- Right now we're in a world with extremely strong and robust demand, but extraordinarily high and broad and persistent inflation. And in that world, the path of policy is actually quite straightforward to me, which is normalize as fast as reasonable without breaking anything."
On what he's watching to shape his policy decisions:
- "What I'm monitoring are the two pieces of that puzzle. Does demand stay this robust? If it stays this robust, that makes a case for [being] expeditious. If it backs off, that makes a case for perhaps being a little more careful.
On the volatile stock market and whether financial conditions have tightened too much:
- "I try hard not to spend too much time looking at the stock market. My biggest concern is that a lot of people in the economy believe that the stock market is the same as the economy. And so I do talk to people, including some pretty sophisticated people, who say something like, 'the stock market's down, we're going into a recession.'
- "To me, it's not the same as the economy. I try to look hard at the economy. And so the worry would be that a stock market that fell too fast, too far, could cause people to pull back [too much]."
- "The tricky part about what we're trying to do is we're trying to quiet demand, without overly damaging demand. That's a very hard thing to do."
On what his contacts are saying about demand trends:
- "Products and services bought by higher-end consumers are still full speed ahead. The combination of excess savings and stronger net worth, even after all this, has those consumers continuing to purchase and spend at levels that feel much higher than historic or normal levels.
- "They're starting to see some quieting in lower-end consumer segments, starting to see trade down in consumer goods for lower-income folks. That's where I think you're starting to see it."
On what he's focused on in the inflation data:
- "First and foremost, the overall numbers. And the reason I say that is not because the overall numbers are the only insight you're going to get, but in a world where you want to make sure you keep inflation expectations anchored, I do think the headline number and the core number on an overall basis are signals to the population in terms of what's happening.
- "We're past the era where you look through an item or two. We're in the era where you need to see the number come down."
- "I don't just want to see the number come down, I want to make sure it's not just driven by one-time things."
On how inflation might come down:
- "My theory of the case is that in the headline number, you've got escalation because of what's happening in Ukraine. Wheat, oil and natural gas. If and when that settles, some of those rates of increase will back off."
- "Then you've got escalation in goods prices driven by excess demand during the pandemic. As we raise rates, as supply chains normalize, the price of goods should come down. And then on the flip side, you want to make sure that in the rotation to services, and as wages continue to rise, you're not seeing an over-escalation in services prices that more than offsets the goods."
On how people perceive inflation:
- "One thing I'm really struck by is how much people thoroughly dislike inflation. There's not a ledger out there where people go 'okay, wages went up 5%. Prices went up 5%. That seems pretty fair.'"
- That's not how the public thinks. That's not how workers think. That's not how businesses think. Businesses think they got higher prices because they have a better product, and that they're paying more money because their suppliers are screwing up."
- "A lot of these businesses had the best year of their history last year. They don't feel like it. Small business sentiment is very low, consumer sentiment is very low. It's the unfairness, it's the uncertainty, all those things really are wearing on people. So we've got to do something about it."