Richmond Federal Reserve Bank President Tom Barkin has a seat at the table on the Fed’s interest rate-setting committee, where he provides the view on the ground on the economy in his East Coast region.
In an interview with POLITICO, Barkin pointed to positive signs in consumer spending but warned the recovery will only be gradual. He pointed to high joblessness as the number to watch, as the Fed tries to steer the country back to where it was in February, when the unemployment rate sat at just 3.5 percent.
“The American people really understand that 13 percent unemployment is not in line with our mandate, in a way that’s much more significant than their understanding of our miss on inflation,” he said. “Now, that doesn’t mean you wouldn’t talk about inflation. Inflation is part of our mandate, but … I think for the American people, they want us to understand that employment matters.”
This transcript has been edited for length and clarity.
Given that there is such uncertainty right now, when you’re assessing what you think is going to happen with the economy, how much of that is anecdotal versus data versus modeling?
I’ve aggregated around myself a whole set of daily and weekly data that I find pretty useful in trying to understand the pace of recovery. … We do have a set of models that we use to forecast the economy. I mean, I’d be lying if I told you that, in this environment, I have a lot of confidence in those models.
We did a survey of 1,000 businesses. … It came back about two weeks ago in our districts and asked them questions like, how close are you to normal? When do you see normal? What [does] normal look like today versus what it looked like yesterday? Just to try to size the impact. And I would own the notion that it’s a very imprecise science, this forecasting. There’s a lot of judgment that goes into it. But … I am trying to parse the question of, in the first instance, how fast the economy is going to return toward normal. And in the second instance, what gap will we have when we’re “at normal,” versus the place we were before.
I am curious what data you’re finding most helpful.
So, I’ve been able to get access to credit card spend data and debit card spend data across retailer type, which is very useful. You saw in early April, those numbers were down overall in the high 20s percent. … And then you can see the week-by-week return, both overall and you have the ability to cut it by state, so you can see states that reopened faster or slower. You can even cut it by income level, so you can see that those at the lower income levels are coming back faster than those at the higher income levels. And those numbers which I said were down in the high 20s, if you look today are down in the mid-single digits.
I should add credit card spend obviously skews a little bit wealthier, debit card spend a little bit less wealthy, and so I like to look at both of them. Because if you just looked at how the wealthy were spending, I think you’d miss part of the story.
Because people who live paycheck to paycheck are much more likely to be actively spending their money, right?
Yeah, what’s really interesting about the numbers that I’m looking at is, when those stimulus payments came out, you could see it in the data immediately. … When you cut it by income, what you see is those who are in the lowest income categories ... actually, over the last two months, have spent a little bit more year over year — just a little, but a little bit more … because they have gotten these stimulus payments. They have gotten, in some cases, enhanced unemployment. And they do tend to spend what they make. You also see credit card outstandings are down, you know, as people have paid them down.
On the higher income levels, not only do you see the categories that they tend to spend in, you know, travel or jewelry or elective surgery, you see those down. But you also see their total spend down. … I’ll speak for myself, but I think it’s true for many others — if you spent the last couple months in your house, working and nervous about what was happening outside of you, the return to commerce feels like a really big step that one takes very gradually, very cautiously. I think if you’ve been going to work every day, and it’s been two months, three months, you’re still healthy, your family’s still healthy, and now a restaurant opens up, it just doesn’t feel like that big of an incremental step. And so I do think there’ll be a difference in return to spending because people see different risks.
In terms of the recovery, where do you think we are? What letter are we in?
We took a sharp down, so the left-hand side of the V is clearly there. … When you reopen you do take a sharp up. I don’t think it goes all the way up to where we were. And then I think it’ll be gradual from there, and I think we’re still headed, even end of the year, to be meaningfully south of where we started the year. … I actually did a lot of work in my house to try to come up with a symbol that represented it. The one that came closest was the square root sign, though my daughter, who’s an engineer, reminded me that actually the square root sign goes above where it started, as opposed to below. So, if you could think of that straight down, part way up and then flattish after it. I think that’s a little bit how I think about it. I don't know that you can draw that though.
The other way to think about it, obviously, which is a little goofy, but I’ve heard some people describe it as a K, where it’s going to be different for different segments of the economy. And there’s probably something to that too. [I was] talking white collar and blue collar a second ago — unemployment [among those who are] college-educated is about 7.4 percent. Unemployment [among those with] no high school degree right now is 20 percent.
You all have been doing what you can to keep borrowing costs low. What more can you all do?
Well, I’d point to this Main Street lending facility, which we just opened up on Monday. I had a conversation with a day care provider last week. He has, I’ll call it six or seven day care operations across three different markets in Virginia. ... And he said, “Look, basically, here’s my situation. I know I’ve got a business that makes sense, and it’s healthy and it’ll work two years from now. I just don’t know how I'm going to get to two years from now.” And he was actually quite interested in the Main Street program, because it does offer principal deferred for the first two years, very back end loaded. If you’ve got a core successful business, you could even refinance it at the end. … We’re certainly committed to trying to adjust and tweak to make sure to hit the sweet spot of businesses like his.
On monetary policy, a lot of people criticize the outcomes, saying that the Fed policies that are expansionary end up increasing inequality, essentially, by increasing asset prices. … Do you agree with that criticism? And do you think there’s any way to calibrate policy so that doesn’t happen?
I’d start by saying that low unemployment … pretty compellingly seems to benefit the disadvantaged. So I think that’s just a fact. And again, you can look at the gap in unemployment, let’s just say in January versus today, between minorities and others and see that in spades. You know, I think it’s a fair question whether low interest rates as a path to low unemployment have consequences that you don’t like. I’m one of those people who probably instinctively would rather have interest rates a little bit higher, all else equal. I think it’s better for savers. I think it gives us ammunition in the next downturn. And, to the extent that there’s volatility in markets, I think low interest rates exacerbates [that]. But I think if you just talk about low interest rates in the stock market, then you’re missing low interest rates in employment. And I don’t think you should have a one-sided conversation on that. I think you should put them all together.
By the way, also low interest rates and inflation because I think there’s some research that would suggest inflation disproportionately hits the disadvantaged as well.
Is there anything that I haven’t asked you about that you would like to talk about?
I’d just come back to uncertainty. Because one of the things that I’ve been pretty focused on in my own research is the impact of volatility and uncertainty on consumer and business sentiment, and then on the economy. ... You got the health side, we’ve talked about that. You’ve got the fiscal side. You’ve got international and political uncertainty. You've got a global downturn. And I do find the businesses that I speak to thinking about 2021. It’s that time of the season. And they’re planning conservatively. They’re planning conservatively in their hiring. They’re playing conservatively in their capital investing, and that is a constraint on our economy going forward. And so I have pushed the notion of, how can we give people more certainty?
One example of that would be if … our public health authorities spoke with one voice on a set of health protocols that would make a workplace safe for workers and make a place of commerce safe for consumers. I think we’d get more people going back to work … and I think we’d get more people shopping there. … More research, better communication on how to give us confidence that what we’re doing is safe would be a real stimulant to our economy and a real diminishment of uncertainty.