The Fed's Tom Barkin On the Impact of Higher Interest Rates

Episode Summary

Executive Summary: The episode centers on Richmond Fed President Tom Barkin’s view that the U.S. economy has proven more resilient than expected despite higher rates, but that inflation risks remain. He emphasizes on-the-ground business surveys over lagged data, notes uneven consumer spending and labor-market frictions, and argues the Fed is watching how tighter financial conditions, oil prices, housing, and strikes affect demand, prices, and growth.

Main Topics: Why the economy looks stronger than expected (Priority: 5/5): Barkin argues the U.S. has absorbed rate hikes better than many anticipated, with growth and consumption still solid even as recession forecasts faded. Ground-truthing the data through business visits (Priority: 5/5): He explains that visiting firms and nonprofits across the Richmond district reveals granular labor and demand conditions that aggregated data can hide. Housing and interest-sensitive sectors (Priority: 4/5): Housing is sharply affected by higher mortgage rates, but supply remains tight and homebuilder activity is still supported by underlying demand. Inflation, pricing power, and wage dynamics (Priority: 5/5): Barkin says this inflation episode was driven more by supply shocks and stimulus than wages, and that firms used regained pricing power when conditions allowed. Labor-market hierarchy and post-pandemic frictions (Priority: 4/5): He describes a reshuffled job hierarchy where remote work, cell phones on the job, flexibility, and pay have changed worker preferences and retention problems. Oil prices and external risks (Priority: 4/5): Rising energy prices are treated as both a direct inflation risk and a possible transitory shock, depending on how long the increase lasts. Fed uncertainty and higher-for-longer policy (Priority: 5/5): Barkin stresses that the Fed’s projections imply tighter financial conditions and that uncertainty about GDP, inflation, and the policy path is unusually high.

Key Arguments: The economy has been more resilient to rate hikes than expected, so recession odds have fallen and growth forecasts may need to be marked up. Aggregated statistics miss major sectoral and income differences; business anecdotes reveal trading down among middle-income consumers and persistent labor shortages in some jobs. Higher rates have hit housing, autos, durables, furniture, banking, and commercial real estate most clearly, but consumption has held up due to excess savings and pandemic-era balance sheets. Businesses are not broadly paying much more in interest because many refinanced during the pandemic, muting the immediate investment drag. Housing prices remain elevated because demand has shifted structurally higher while supply is constrained by low existing mortgage rates and demographic factors. Inflation was not mainly wage-driven; instead, prices rose first due to supply shocks and stimulus, then wages followed in several sectors. Some sectors still show wage-price pass-through, especially services and healthcare, where labor is a dominant cost and firms may need to pass costs through. The Fed should evaluate the combined effect of tighter rates, longer-term yields, equity prices, and oil prices as financial conditions, not just the policy rate itself. Higher oil prices matter immediately for sentiment and headline inflation, but the Fed may look through them if they are brief and reverse quickly. Policy uncertainty is elevated because the economy’s recent performance has been stronger than earlier forecasts suggested, while inflation remains sticky.

Data Points: Fed tightening duration: 18 months - Barkin said the Fed has been raising its benchmark short-term interest rate for 18 months. Long-term yield: 30-year yield around 4.7% - Traci referenced the long end of the bond market after the recent sell-off. Job-market visits: Eastern Shore, coal country in South Carolina, Southern Virginia, Northern Virginia suburbs, Western Virginia - Barkin listed the regions he had recently visited to talk with businesses and nonprofits. Consumer spending: “Unbelievably resilient” - Barkin described recent consumer-spending data as stronger than many expected. Middle-income consumer behavior: Trading down - He said middle-income shoppers are buying food at branded grocery stores but school supplies at dollar stores. Labor-market example: Workers leaving for Bojangles - A South Carolina manufacturer said it was losing workers to a fried-chicken restaurant because of flexibility and indoor work. Coal-mining labor issue: Cell phones don’t work inside a mine - A coal-mine owner said workers dislike jobs where they cannot bring their phones. Housing market share: 10% of the market - Barkin said new construction, representing about 10% of the housing market, remains relatively vibrant. Adjustable-rate mortgages: 8% of all mortgages - Barkin noted ARMs remain a small share of mortgages compared with the 2000s. Corporate interest expense: Basically exactly where it was in 2019 - He said interest expense as a share of revenue is near pre-pandemic levels on average. Core PCE run rate (last 5 months): 0.3, 0.3, 0.3, 0.2, 0.2 - Barkin cited recent monthly core PCE readings. Core PCE annualized run rate: About 3% over the last 6 months - He translated the recent monthly readings into an approximate annualized pace. Core inflation over 12 months: About 3.5% - Barkin estimated 12-month core inflation based on recent data. Median inflation forecast: 3.7% - He referenced the Fed’s SEP median forecast for inflation. Q2 GDP growth: 2.1% - Barkin cited second-quarter GDP as stronger than trend and stronger than earlier expectations. Q3 GDP forecast: 4.0% to 3.6% - He mentioned one forecasting firm revised its third-quarter estimate down from 4.0% to 3.6%. Travis Kelce jersey sales: 6x increase - He joked that jersey sales surged after one Skybox appearance by Taylor Swift.

Pivotal Quotes: "The data comes in late. It’s then revised three times." — Tom Barkin: Explaining why he relies on frequent business visits to sanity-check official statistics. "The hierarchy of jobs has gotten thrown up in the air." — Tom Barkin: Describing post-pandemic labor-market shifts in pay, flexibility, and worker preferences. "I do believe in capitalism, and I do believe that companies raise price when they have an opportunity and lower price when they have a benefit." — Tom Barkin: On pricing behavior and why he rejects a simple greedflation framing.

Implications: Listeners should expect the Fed to stay cautious: growth is holding up, but inflation and oil remain risks. Housing and labor are still distorted by pandemic-era shifts, so policy may work slowly and unevenly across sectors.