MNI INTERVIEW: Fed's Barkin Prefers Simple, Flexible Taper

Federal Reserve Bank of Richmond President Tom Barkin told an MNI webcast on Tuesday he prefers a simple, flexible approach to winding down the central bank's bond purchases and for the process to begin after millions more people return to work.

He would be "open minded" about phasing out mortgage bond purchases faster or sooner than Treasuries, and would ideally like to complete tapering before raising interest rates, he added.

"I recognize and appreciate the arguments of folks who say the housing market is pretty hot right now," he said, but "making the case you want to try to differentiate the kind of liquidity" the Fed is providing markets "feels complicated."

Simplicity in approach is a priority, he said. "I also have some preference for the least-drama way of moving back to normal," he said. A flexible model that gives the Fed "optionality" to respond to the economic outlook is key, Barkin said.

"I do want to be ready to raise rates when the conditions on raising rates based on our outcome-based guidance are met," whether or not asset purchases have finished, said Barkin, who votes on the FOMC this year. "Obviously if you've got the ability to design a perfect world, you wouldn't raise rates and taper at the same time," but "I don't see any particular reason to rush through it if we don't think we're going to get there."

MORE LABOR PROGRESS NEEDED

As for the timing for withdrawing balance sheet stimulus, Barkin said the Fed has met its "substantial further progress" bar on inflation but not yet on employment.

With the employment-to-population ratio still around 58%, 3 percentage points short of its pre-pandemic level, "it feels like further progress but doesn't yet feel like substantial further progress, and that's the metric I'm watching," he said.

Temporary factors including enhanced federal unemployment benefits, a lack of child care and lingering health concerns are still keeping some employees at home, while others have built a savings cushion and can afford to be choosy about returning to work, Barkin said.

"You could build a case that this economy is not going to get over 59% (in the employment-to-population ratio) but I just don't believe it," he said. "I can point to very real reasons why people are out of the workforce, and the economy can get significantly farther along than it is right now on the labor side."

INFLATION SURGE TEMPORARY

Worries over the inflation surge in recent months may be overdone, Barkin said. Businesses are inclined to revert to a pre-pandemic mindset on price-setting next year as supply and demand imbalances resolve, though further rising costs and trade tensions could force firms to raise prices a bit faster.

"People haven't decided we're in a different regime. I think people intuit that this is temporary and we're going to go back to something like the old regime, maybe with a little higher inflation expectations," he said.

Firms have been "comfortable capitulating and raising prices" this year, but notable price hikes in used cars, rental cars, airfare and hotels have been driven by supply bottlenecks and consumers re-engaging in travel, he noted.

"I do expect to see price in a lot of those categories actually revert," he said. "Businesses don't like to increase prices."