Transcript: AP interview with Richmond Federal Reserve President Tom Barkin

WASHINGTON, D.C. (AP) - Here's a transcript of a Wednesday interview conducted by the Associated Press with Tom Barkin. He is president of Federal Reserve Bank of Richmond. The transcript has been lightly edited to improve clarity and length.

Q: The inflation report is certainly the big news today. What did you make of it? What does it tell us about the direction of inflation and how Fed policies are working?

A: It's -- the inflation is still high, or I would call it stubbornly so. The headline and core were as expected. But if you look at any report and focus on the core - which is the best place to start - you will see that it comes in around.4%,.5% or.3%. This is not what you would like to see.

It is important to check out the single timers. Some numbers have moved a great deal, like the price of used cars. Others have moved a great deal down like hotels and air travel. Looking at all of that, I still think it paints a picture that inflation is stubbornly high.

What I believe is happening, and I have spoken about it a bit, is that businesses, firms and consumers experienced 30 years of basically zero inflation, which was very stable and within our target. This has really tightened up their expectations to 2%, as they consider that to be a reasonable amount to both ask for and receive. The last two years have been a time of high inflation and persistent talk about it. I believe that this has opened up people's eyes. I believe firms are trying to get a better price. The consumers seemed to be more accepting of it. It will take some time to get back to where we want to be. It will take some time.

Q: What is the meaning of the Fed's statement from the last meeting which suggested -- or at least implied that there could be a pause? Do you support this and how will today's report impact it?

A: I think that the way I viewed the last meeting was that, looking ahead, there is a great deal of uncertainty. This uncertainty includes our actions to date and their impact on demand, inflation, etc. This includes the impact on banks' behavior and demand of the credit conditions. The consumer spending will be affected by how quickly the excess and fiscal savings are worn out. It also includes external events, such as the debt ceiling. There will be a lot more uncertainty and data.

The timing of the round will allow us to have two CPIs and two job reports in between our monthly meetings. It made me more comfortable with data dependency. So that's the message I take from the last statement. Also, the option to wait when it is appropriate. There are a lot more data being collected. There is a lot to consider and it's good that we have the time.

We got the jobs report yesterday, and today we have the inflation report. Both were very positive. Would you be comfortable pause at the next meeting if those two reports were combined?

A: My reading of the jobs report shows that there are signs of cooling. This could be due to the slowing of the job growth, the decrease in openings, or the stabilization or reduction of quits. But it is still very hot. As you may know, a rate of unemployment of 3.4% is the lowest in 54 years. Wage growth remains high. This week, we saw the productivity figures. Unit labor costs are still high.

What I see is that employers, who were scrambling to find workers during the pandemic, are now reluctant shed. And there are still many segments that are very tight. Waiters and waitresses are still in high demand. Construction and skilled trades are still in high demand. I still think that you have a hot market. We'll get a lot more data in the next five week between now and our meeting. We'll then see what we can learn. I don't like to declare a position before the data is collected.

Q: I believe that last month you stated that you were looking for more evidence to show that the Fed was achieving its inflation target. Just to review today's report: Do the numbers suggest that the inflation is moving back towards the Fed's target?

A: I haven't been convinced yet. I am open to being persuaded and my thinking is as follows: Over the past year and a quarter, we've heard many stories about inflation from the market. Not the Fed.

For a time, it was believed that the supply chain and commodity price would return to normal. They have, in fact, returned to normal. However, inflation still persists. The story was that the Fed would be on the case, and the rates would move so quickly. This would lower expectations and bring down inflation. Market measures of expectations are now down. As I have said, inflation remains stubbornly high.

Some people today say that the metrics are behind and inflation is already down even though the numbers don't show it yet. I am still searching for proof of this. The demand story is what I believe to be the most important. It says that the combination of declining fiscal, consumer balance sheets eroding, or the lag effects of rate movements and credit tightening in the banking sector, will bring down demand and, consequently, inflation. This is a plausible scenario.

The signals would begin with demand, and then move on to inflation. So I will be watching for signs that the demand has dropped to levels consistent with deflation and would love to see that confirmed by signs of falling inflation.

The real-time spending metrics that I monitor suggest this will continue. Business investment has declined, and housing prices have settled. The job market, as we discussed earlier, is still relatively hot. I am still open to the idea that demand will settle and inflation will be on its way in a relatively short time. But I would not say I'm yet convinced. I am open to this possibility. I am waiting for the evidence and reports that will be coming in the near future.

Q: How much of a factor would you say the tightening credit will be as a result of the turmoil in the banks? What might you hear from businesses and banks in your district regarding how all of this is playing out?

A: I am in contact with the banks of my district. I hear them say that deposit flows are stable and they have invested in liquidity. The resilience that I see in these banks is encouraging. As you may know, resilient banks can tighten credit to optimize margins or preserve liquidity. I feel as if I am hearing more about credit tightening in commercial real estate segments. I would also add marginal credit. I feel that the banks are also tightening their margins, regardless of whether they have a marginal credit that is less attractive, either from a profit or loss perspective.

So, I think that it is happening. The challenge will be determining the impact of this on the economy as a whole. There have been many studies, but the 2008 crisis and the Lehman Brothers incident has dominated the studies. If you take a cue from the 2008 crisis, then you'd say that this incident would have a major impact. There haven't really been many situations like this to draw much of a signal from, so I don't think this incident is of that type. So, I'm trying figure out the impact. We don't have any precursors that are directly relevant.

Q: What is your outlook for the economy?

A: I see a cooling in demand, as I believe I stated earlier. Consumer spending is the most compelling for me, as you know it makes up 68% of GDP. After a robust January, February and March, I feel that the economy has gone from a significant growth rate to a plus or minus flattish year-over-year.

So, this is the cooling. Investment in business has also decreased, at least real-terms. When you add them all up, it's a large part of the economic system. So, I can see that the economy is cooling. It's hard for me to say at this stage whether the economy is cooling enough to bring inflation down to the level we need.

The big uncertainty is that we are not just relying on rate increases to dictate this. Credit conditions are difficult to quantify, as we discussed earlier. We also have uncertainty about the wider environment. You can read all about the Washington meetings in the newspaper right now. I think the amount of uncertainty will cool down the economy.

Q. But the Fed staff has forecast a recession. Is that too far for you to go?

A: I can easily imagine a recession that leads to a negative GDP growth this year or the next. We'll see. It's possible that it won't, and I think this is the challenge when you look out two, three, or four quarters. A lot of outside events will dictate it more than model-based estimates on what lagged rate movements are due to GDP or spending.

As I have said, I see it as cool. It makes sense that it would cool down, given what we have done and the credit conditions. It makes sense to me that it would cool, given what we've done and the credit conditions.

What is required to raise rates again in June, or even later in the year? What data would be required to justify another rate increase?

What I am testing, according to me, is the story I told you, that is, will demand slow down at a pace fast enough to bring inflation back in a convincing way toward our 2% goal. I believe that is the statement - as I said, a plausible story can get you there but it's important to be open to both being right or wrong.

If you want to know if that's right, I will be watching for signs. Your question was: What did it take for you to restart? I don't have any special feelings -- we haven’t stopped. I don’t believe any particular -- I do not think that there is any hurdle to me doing it, other than being persuaded.

What would I find most compelling? Signals that the demand was in fact not decreasing. If you start seeing strong demand, such as consumer spending or employment growth, then it will not be in a gradual cooling pattern but rather something more significant. This would change the story about demand. You could also think that inflation is accelerating, or about to accelerate. This could be (inflation report), or it could be issues on the supply side, which would affect inflation. You're testing a story in your head. If you find evidence to support it, that's great. But if there is evidence to the contrary, then you need to be aware of that.

Q: At this time, is the Fed's main interest rate at an unfavorable level? Is the rate high enough to slow down growth, to achieve that desired slowdown?

My hypothesis is we are at restrictive levels. This is because I consider it rates against inflation expectations. You'll find that real rates are positive if you compare market-based or surveys-based inflation expectations for one year in advance to the Fed Funds rate or an one-year Treasury Bill. The range is somewhere around (1.5%). This is what I feel. This is -- I know you already know this -- estimates of the neutral rate can be unreliable, they can change, and they have an extremely wide range of confidence. You have to be willing to learn from your experience. If you see that the inflation rate is not decreasing, or if the demand for goods and services does not weaken, you have to question whether or no the restrictions are sufficient.

Q: Can you check on the inflation and labor market? Chair Powell outlined a scenario in which inflation could be cooled without a significant increase in unemployment. Do you agree? Do you believe that it is possible for things like job openings to decrease and this could help cool wage increase?

A: If you look back at the labor market a year ago, you will see that there was a strong demand for workers when the economy recovered and the spending boomed, but a very small supply, as immigration restrictions were imposed during COVID and many people left the workforce. This led to an increase in wage pressure.

The demand for workers continues to be high. Even in the past two or three month, job growth was healthy and above replacement levels. Two things have offset the pressure.

Immigration is one of the most important factors. So the number of prime-age workers born outside the country has basically returned to the trend before COVID.