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Richmond Fed President Thomas Barkin speaks with Yahoo Finance [Transcript]

Brian Cheung
·14 min read

Thomas Barkin, president of the Federal Reserve Bank of Richmond, spoke with Yahoo Finance to discuss the economic implications of spiking COVID-19 cases and what lies ahead for Fed policy.

Below is a transcript of his appearance on November 18.


BRIAN CHEUNG: Joining me now is the President of the Federal Reserve Bank of Richmond, that’s Tom Barkin from Hughesville, Maryland. Hi there President Barkin, how are you?

TOM BARKIN: Good, thanks for having me on today.

BRIAN CHEUNG: So I want to get started with a conversation just about the economic outlook. Obviously this week we had a record amount of new COVID cases, over 180,000, but on the other hand we’ve also had positive developments on the vaccine, so Pfizer, BioNTech saying their vaccine today is 95% effective. We got the Moderna news on Monday as well. So both of those things together, net net are those developments causing you to revise up or down your economic outlook?

TOM BARKIN: Well, you’ve got near-term and you’ve got medium-term. Obviously one of the scenarios that we were all worried about one, two, three, four months ago was a second wave scenario. I think if you look at the case rate, the hospitalization rate today, you have to say that it's elevated. And I take from it that as cold weather comes and people spend more time inside, the infection rate is going to increase. And so I think for the next few months, it'll be a challenge. It'll be a challenge as people try to adapt to their perception of increased risk and it’ll be a challenge as governments try to adapt to what they could do to handle that.

On the positive side, I think these vaccine results have put a light at the end of the tunnel. And most people I talked to suggests it's summer, when you're finally going to see the light, as opposed to next month, but I think that's a very positive thing for businesses who now might see a path to invest and certainly for some people in those harder-hit industries who now might actually see some hope at the end of that, when we get that vaccine distributed.

BRIAN CHEUNG: Now at the same time it seems like a lot of businesses and economists for that matter are not hanging their hat on that vaccine, saying that it's still going to be some time before we get that as you just pointed out. But in the meantime, if it is indeed not until next summer that we get something, would that force the Fed to do more if we're on the trajectory that we're on with the amount of COVID cases and deaths right now? And if so — the Fed having to do more — what might that mean or look like in your view?

TOM BARKIN: We're doing quite a lot. We've taken rates down to near-zero as you know, we've put forward guidance in place that says we're going to keep rates low until such time as we're through all this. And we're engaging in asset purchases, which are incredibly high by historical standards. I'd also say that every month we engage in those asset purchases is more stimulus. In other words, we did it last month if you do it again next month and the month after that's more stimulus and I think that's a lot of support to the economy. In terms of whether we would do something different and more, let's just see how it goes. I mean we're projecting a lot. Let's see how it goes.

BRIAN CHEUNG: So when it comes to those asset purchases it's been floated that you could target a larger quantity of purchases, or you could tailor those purchases towards certain types of securities, maybe on the longer end, but bond yields right now looking at it I think the 10-year around 87 basis points, 30-year around 161 basis points. Are longer-term interest rates already fairly low, in your view?

TOM BARKIN: I think they are fairly low. I looked at a chart in the last couple days that showed where 10-year rates were today versus where they were in the last downturn. And people forget that you were in 200, 250, 300 basis points for large parts of the last recovery. And as you said we’re at 80 or 90 today, so I do think interest rates are quite low today.

BRIAN CHEUNG: So I want to shift gears now to the framework review, the Fed saying that it'll tolerate inflation rising moderately above its 2% target for some time in addition to trying to get to maximum employment. But an important caveat to that it sounded like was that the Fed could tighten or adjust its policy if it felt like financial stability risks were emerging. In your view what might be a financial stability risk that could be substantial enough to cause the Fed to to rethink or recalibrate its policy?

TOM BARKIN: Well, in this review we acknowledged I think a couple things that were certainly clear to me beforehand and perhaps to others. One is that there's nothing bad about low unemployment, and the notion of being pre-emptive with low unemployment without signs of other risks was probably not the move we need to make. And so I think we made that clear I think. I certainly was in the mood of being willing to tolerate moderate overshoots of inflation, I think it made that clear as well. And then I think it made clear that a sound economy requires financial stability, and so all those can clear in both our framework discussion and also our most recent statements, which have said, we'll keep rates low until quite a long time certain conditions on that and then that'd be true unless we saw risks develop. I think we'll have to see what kind of risks develop. I do personally look closely at the implications of lower for longer policies on people's reach for yield behaviors and on the build-up of leverage.

And so the thing I personally spend time looking at is leverage and leverage on personal balance sheets and leverage on corporate balance sheets. I'd point out that while corporate leverage is somewhat up, personal leverage is actually still somewhat down. We've seen credit card payments actually go down quite a lot over the last six months — credit card balances go down quite a lot in the last six months. But that's what I focus on now. How that plays into what we do with rates or asset purchases or whatever I think would be to determine but that's what I look at because if you're not going to have a sound economy without a stable financial system.

BRIAN CHEUNG: And I guess just to be clear, that's not necessarily saying that you see that as the case right now: financial leverage building to a level that would be of concern? We've heard people flag, for example, leveraged loans but where do you see those pressures right now?

TOM BARKIN: Yeah, there are elements that are historically elevated but in total I don't think leverage at this point is at historically-elevated levels, that's what I'm watching.

BRIAN CHEUNG: Another part of the frame of review is the real focus on inflation we did get interesting remarks from Vice Chairman Rich Clarida this week saying that his approach to personal consumption expenditures, one of those measures of inflation, is going to look at the average PCE using August as kind of the start timeframe — which is when the framework review was unveiled. It wasn't clear to me based off of that speech if that's uniform, whether or not each member of the FOMC is beholden to that same interpretation. So I guess from your vantage point as one of the members of the FOMC, is that also your interpretation of how to measure when inflation is moderately above its target? Or are you kind of free within a range to kind of evaluate inflation on your own criteria?

TOM BARKIN: I think what I'd say, first and foremost is we're pretty explicit in the communication around the announcement of the framework review that we're not going to a formulaic concept. We're not talking about, add up this, divide by that and if the average is greater than x we do y and less than z we do something else. So, I think we've made that pretty clear so I don't have an average formula focus. I think it's judgment based against the words, we've got in that statement. So that I think maybe I'll just pause there.

BRIAN CHEUNG: I guess what's interesting too is that the Vice Chairman was saying it's not just core PCE as a lagging indicator that we're looking at, it really is more about inflation expectations, and a dashboard of other data as well. What do you watch on that front?

TOM BARKIN: I watch actual inflation, watch inflation expectations, and as a lot of people have said, including the Vice Chair, there's a lot of different ways to measure inflation expectations and it's hard to get precise. I also try to as best I can access the minds of those people who are price setters in the economy. I spend a lot of time as you know, engaged with businesses, as we do, for example a CFO survey, which has pricing as one of the key things they're looking at. I'm just trying multiple ways to see what are people expecting, in terms of inflation and how much pricing power do they feel they have. I think you can learn a lot there on the ground.

BRIAN CHEUNG: So you mentioned on the ground. Again you're in Hughesville, Maryland right now meeting with contacts, you are a person who has been very storied in the business world as well. I'm switching to the other side of that dual mandate from inflation to employment. We know that the Federal Reserve is really pinning its hopes on trying to get back to where we were before the crisis. Based off of your conversations with business owners, workers, those who have lost their job in the fifth district, the Richmond Fed, how far away are we from full employment right now in November?

TOM BARKIN: We're certainly far away from where we were in February. If you held participation constant, the 6.9% unemployment that we've reported would actually look like 9.4%. Today it's about 10 million jobs and that's about 6.6% fewer jobs than we had before the crisis and that compares to the peak of the Great Recession, we were down 6.3%. So we're still pretty far from where I think would be full employment. Now the challenge we've got is that the jobs that have been surplused are disproportionately all in one type of job: personal contact service workers. And those personal contact service workers are disproportionately young and then disproportionately people of color. They're disproportionately in the bigger cities, and the jobs that are actually if I talk to employers I hear a lot of people talking about: they can't find workers, and those employers that can't find workers are disproportionately in manufacturing, they're disproportionately in technology, they’re disproportionately in health care, and they're disproportionately in some of the smaller towns. And so one of our challenges here is making that match. And it's hard to make a match when we may have a vaccine and it may roll out in a couple months and we may go back to normal anytime soon. So people's willingness to invest in retraining or rescaling or invest in moving to a new geography is limited, so I think we've got a mismatch issue right now. That is leading some people to actually have to raise wages well before you would think it was full employment, because we've got this — I'll call it temporary mismatch — between the people and the skills that have been surplused and the people that skills, locations where they need to hire people and that's the place I'm very focused right now as I talk to employers, as I talk to people throughout our work.

BRIAN CHEUNG: So when we talk about building the bridge for some of those disproportionally affected people in the meantime at least they've had unemployment insurance to turn to. But there's something interesting about how the Pandemic Emergency Unemployment Compensation which is the extended benefits for longer-term unemployment, in addition to Pandemic Unemployment Assistance for gig contract workers that aren't normally eligible for UI, those benefits that are part of the CARES Act are going to expire December 26. We know this is going to be longer than that, then that these people will be out of work, what would that cliff do based off of what you were just saying about how dire it is for those people to get help. And do you think that puts an onus on policymakers to do more.

TOM BARKIN: Well those benefits do expire and certainly for a number of those individuals affected I think the question of whether they can get access to additional benefits to bridge them is an important issue. I don't know how big a cliff that'll be for the economy on any given day. And the reason for that is, there's been a lot of stimulus already put into the economy. And I've been intrigued with numbers that have shown excess savings, if you will, in the US population somewhere in the range of about $1.2 trillion since April, and that $1.2 trillion, unlike most savings rates, is actually pretty evenly distributed across the population. So if you want to think about it this way, the bottom quartile has about $300 billion in excess savings. Now not everyone has that. And so some people who are really close to the edge are going to be in trouble. I was talking to a utility today about some of the issues in terms of people not paying their electricity bill. Those are people close to the edge and they will need a bridge of some sort.

But in total for the economy, I think that money will continue to bleed into the economy at least in the bottom quartile, bottom half for some time and that'll bridge the total numbers, somewhat. And so, I do think we've got to think about the folks at the bottom and we do have to think about them individually and how they're going to bridge to what comes next. That's different from the impact on the economy in total.

BRIAN CHEUNG: And then last question here, shifting focus to the Federal Reserve's liquidity facilities. Same kind of thing with the timeframe 12 of those liquidity facilities by my count are set to expire December 31. Based on the uptake in your district by businesses, whether it's the Main Street Lending Program or maybe larger companies taking advantage of the corporate debt backstops, do you feel that those facilities should be extended?

TOM BARKIN: We adopted those facilities during a time of a great crisis in the markets. I think, it seems very clear to me that even the announcement of those facilities had positive effects in a lot of those markets. I think the uptake at this point is modest in most of those facilities. And so the question of extension is a risk management question, I don't think it's a question of, we're going to evict a bunch of borrowers who won't be able to borrow the next day. It's a question of how confident, do you feel about the health of the markets over the next period of time. And how much do you value having that backstop. I think it's risk management and I think the backstop has been providing very positive risk management and taking it away obviously means taking a risk.

BRIAN CHEUNG All right. A very thorough conversation as the economy continues to face a pretty important inflection point with the COVID cases rising but again, Tom Barkin president of the Richmond Fed. Thank you so much for joining us here on Yahoo Finance this afternoon.

TOM BARKIN: Thanks. Great to be with you, appreciate it.


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