Regional President Speech

Home / News / Speeches / Thomas I Barkin / 2022 Cecil County Chamber of Commerce Elkton, Md. • Since the mid-'90s, in�ation has been low and stable. But no one is forgetting in�ation today. At �rst, in�ationary pressures seemed temporary, driven by pandemic reopening or supply chain challenges like chips in cars. But the in�ationary news just keeps coming. • All of this has depressed consumer sentiment, and business sentiment has fallen too. So, we need to get in�ation under control. • I see in�ation coming down on two paths. A number of these pandemic-era pressures will eventually settle. At the same time, interest rates will impact demand and expectations. And, as we act, we send messages to consumers and �rms that will manage their expectations for future in�ation. All this will take a little time, but make no mistake, we are on the case. It’s great to be with you in person today — and thank you to Debbie and Sharon for inviting me and that nice introduction. I want to spend today talking about in�ation. These are my views alone and not those of any of my colleagues on the FOMC or in the Federal Reserve System. I grew up in the ‘60s and ‘70s — an era when in�ation emerged and then became omnipresent and painful. A wage and price freeze left supermarket shelves bare. Twin oil crises led to panic at the pump. President Ford issued Whip In�ation Now buttons. You couldn’t go anywhere without hearing the Bee Gees — it was a tough time. By the mid-‘70s, core Personal Consumption Expenditure (PCE) in�ation reached 10.2 percent — nearly twice as high as what it is today. But in the early ‘80s, the Fed under Paul Volcker actually did whip in�ation. Of course, things got bad before they got better — it was the ultimate hard landing: Unemployment reached nearly 11 percent in 1982. The economy fell into not one, but two recessions. But since the mid-‘90s, in�ation has been low and stable. And the Fed learned a hard lesson: the role in�ation targeting plays in delivering anchored in�ation expectations, thereby creating a healthy foundation for the economy. I have a theory that memory matters. Recessions happen every 8-10 years because that’s how long it takes for a leadership team to rotate, believe they know better and then repeat the errors of their predecessors. Real estate lenders overreach every 15-20 years (1970s, 1990s, 2000s) as credit o�cers turn over and memories fade. The Roaring ‘20s, the Go-Go ‘60s and the internet bubble of the early 2000s perhaps demonstrated that market memories only last 30-40 years. And after 30 years of price stability, maybe the same thing happened with in�ation. Prior to the pandemic, the focus was on how to move in�ation up, not down. The Phillips curve came into question. Virtually no professional forecaster predicted the high, persistent in�ation we’ve been experiencing. Well, no one is forgetting in�ation today. The most recent Consumer Price Index is 8.5 percent. The headline PCE, our preferred metric, is 6.6 percent. Core PCE is at 5.2 percent. Demand is strong and looks to remain robust, fueled by healthy business and personal balance sheets, the need to replenish low inventories and state governments that are �ush with cash. Supply chains have been overwhelmed, and suppliers are struggling to bring them back into balance. Labor markets are also tight: Unemployment has dropped to 3.6 percent. In addition, the pool of available labor has shrunk: 1.2 million fewer workers are in the workforce, and immigration remains well below its pre-COVID-19 trend. As a result, price pressures are everywhere. In�ation is high, persistent and broad-based. At �rst, in�ationary pressures seemed temporary, driven by pandemic reopening or supply chain challenges like chips in cars. But the in�ationary news just keeps coming, whether it is a severe winter storm in Texas, a �re at a chip plant in Japan, a ship lodged in the Suez Canal or a backlog in Long Beach. And, of course, most recently, we’ve seen commodity price shocks coming out of the con�ict in Ukraine and new lockdowns in China. These have made in�ation the headline of the day — as of May 1, the Wall Street Journal has had an in�ation story on its front page 25 times this year. And on social media, a widely shared post jokes that in 2020 we couldn’t leave the house because of COVID-19; now, we can’t leave because of skyrocketing gas prices. All of this has depressed consumer sentiment. In the most recent Michigan Survey, the overall index of consumer sentiment (April - 65.2) was at levels last seen in the aftermath of the Great Recession and is below where it was at the height of pandemic lockdowns. That is remarkable given the strength of the economy and the job market. But sentiment is being driven heavily by in�ation. Respondents expect the year-ahead in�ation rate to remain high at 5.4 percent. The last two months have had the highest expectations since 1981. Thirty- eight percent say they’re in a worse �nancial position than they were a year ago. Buying conditions for purchasing a car, a house or an appliance are at their lowest levels since the early ‘80s. Business sentiment has fallen too. In the Richmond Fed’s most recent CFO Survey (conducted in partnership with Duke and the Atlanta Fed), optimism about the U.S. economy dropped nearly 6 points from the fourth quarter of 2021. CFOs cited cost pressures and in�ation as their top concerns. When looking at small-business owners, optimism is even lower. In March, owners who expect better business conditions over the next six months dropped to the lowest level in the survey’s history. Like the CFOs we surveyed, in�ation was their top business problem. We now remember that people thoroughly dislike in�ation. Workers who feel they have earned their wage gains feel arbitrarily pinched at the gas pump. Homeowners like their sale price but can’t believe their purchase price. Businesses work to capture value through pricing but feel they’re being taken advantage of by suppliers. They feel powerless in the face of cost increases that tax their revenues, earnings and appreciation they have worked to achieve. Why do people hate in�ation? Well, no one likes to deal with change, and we haven’t had to think about in�ation for over a generation. And no one remembers the ‘70s fondly. In�ation creates uncertainty — as prices rise unevenly across sectors and over time, it becomes unclear when is the right time to spend versus save and where to invest. In�ation is also inherently redistributive — in the ‘70s, those who owned a house with a cheap mortgage bene�tted; those on �xed incomes didn’t. Those who had wages indexed to in�ation did better than those who didn’t. And in�ation adds to your workload. It takes e�ort to shop around for better prices. Businesses have to handle complaints from unhappy customers, negotiate with insistent suppliers and address any resulting margin pressure. Finally, Robert Shiller taught us that people feel in�ation erodes their standard of living by diminishing their buying power, whether it raises their nominal income or not. Higher prices mean you can buy less. The pain of in�ation tends to hit low- and �xed-income populations the most. Low-income households dedicate a higher percentage of their wages to consumption than those with higher incomes. There are estimates that the average U.S. household will have to spend over $5,000 more this year compared to last year for the same consumption basket, and that impacts those who have a tighter monthly budget. To be clear, not everyone loses with in�ation. We have sectors where nominal wages are up well in excess of in�ation, like leisure and hospitality. We have a lot of homeowners whose houses are worth much more than they could have imagined. And a number of �rms reported record pro�ts last year. But it doesn’t matter — everyone hates in�ation. So, we need to get in�ation under control. Congress has given us this mandate. And it’s time. We can’t do much about short-term price surges. Think of it like the aftermath of a hurricane. Lumber prices increase temporarily as demand spikes for materials to make necessary repairs. Raising rates wouldn’t lower lumber prices when people need to rebuild their homes. Instead, when supply catches up to demand, these price movements reverse themselves. But in the medium term, our moves matter. So, we have begun a tightening process. We raised interest rates 25 basis points in March and then another 50 basis points in May. We also announced our plans to reduce our balance sheet, starting on June 1. During his press conference, Chair Powell noted that additional 50 basis point increases could be on the table in coming meetings as we work to normalize rates. We will do what we need to do to contain in�ation. But how exactly will our rate moves do that? I see in�ation coming down on two paths. A number of these pandemic-era pressures will eventually settle. Chips will �nally get into cars, and car prices will come down. Labor force participation will continue to rise as COVID-19 eases. Ports will open up as consumers rotate back from goods to services. At the same time, interest rates will impact demand and expectations. Borrowing rates have already risen, and that will a�ect investment levels and spending on interest-sensitive items like houses and cars. And, as we act, we send messages to consumers and �rms that will manage their expectations for future in�ation. All of this will take a little time, but make no mistake, we are on the case. You might ask if this path requires a Volcker-like recession. Not necessarily. At 83 basis points, we are still far from the level of interest rates that constrains the economy; for my colleagues on the FOMC, this neutral rate is in the range of 2-3 percent. And before the Great Recession, the economy handled rates even higher than that. Once we get in the range of the neutral rate, we can then determine whether in�ation remains at a level that requires us to put the brakes on the economy or not. In�ation is high. It has real costs to both individuals and businesses. By contrast, getting in�ation closer to the target rate creates the certainty that enables growth and supports maximum employment. That’s why we care, and that’s why we are tackling it. This re�ects the di�erence in total nonfarm payroll employment between February 2020 and April 2022. Bureau of Labor Statistics via Haver Analytics. Buying conditions for purchasing a house and large household goods are at their lowest levels since the early 1980s. Buying conditions for purchasing a car are at their lowest levels on monthly records dating back to 1978. In�ation Monetary Policy Receive an email noti�cation when News is posted online: By submitting this form you agree to the Email Address Subscribe (804) 697-8956 (804) 332-0207 (mobile) © 1997-2024 Federal Reserve Bank of Richmond

Tom Barkin (2022, May 9). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20220510_tom_barkin

@misc{wtfs_regional_speeche_20220510_tom_barkin,
  author = {Tom Barkin},
  title = {Regional President Speech},
  year = {2022},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20220510_tom_barkin},
  note = {Retrieved via When the Fed Speaks corpus}
}