Fed Reserve Bank of Richmond – CEO Updates; Need to “Talk With People and Business Owners”

In last week’s Economic Update with Tom Barkin (CEO of the Federal Reserve Bank of Richmond), we learned some very good information and some guardrails for this region’s businesses (Region 5, Mid-Atlantic, including Virginia). This feedback aligns with the Fed’s recent announcement of likely prolonged interest rate hikes, to encourage “disinflation” (vs. deflation) for the remainder of the year.

The discussion built upon the material covered in a recent speech.

  • Are the economic models we use still reliable after Covid? A: It depends on the key assumptions, like what will the persistence of inflation look like. If we assume it reverts back quickly to 2%, as historic patterns, that’s one path. If it’s “intertial”, i.e. it comes down slowly, that’s a different path (and seems to be the one we’re on – WestXDC).
  • “Here at the Fed”, with so much uncertainty in the economy, we’ve found it critical to be able to get out of our “ivory tower”, get back into the communities and talk to business leaders (this is the key solution pathway for local businesses, per WestXDC, to inform and help ourselves through more networking and information-sharing). This business era is very confusing for most, and there’s no way to cut through the fog, other than to talk to people who are living through the economy in real time.
  • Consumer spending was bolstered by the stimulus payments, including pay down in credit card debt, some higher wages, more social security benefits. However, interest rates are increasing, in interest-sensitive areas (like home construction, remodeling, auto financing, etc.). Therefore, there will be slowdown in spending, but it may not fall off cliff, there’s still enough money out there – and therefore continued rise in interest rates is still the route to disinflation we can take per monetary policy. 
  • Is 2% inflation still the target?  A: We can’t really have the discussion about whether it’ s a good target, till we reach the target.  (So a bit of a standoff, to wait and see if the rate increase strategy works, for a while longer -WestXDC).
  • Finding workers with the right skills still seems to be impossible… where did they go? A: There’s about 3.5/M fewer working, through 1.5M 65+ who retired, 800k are (legal) immigrants who didn’t appear (because of visas/covid), 500K who died per Covid (and related). Small businesses, skilled trades, hot demand sectors (like cybersecurity), that’s where it’s really an issue.
  • Are there competitive economic and business advantages the 5th district here, over other districts around the country? A: The mid-Atlantic does have some competitive advantages. (1) Washington DC and a one-hour radius around it represents a more stable part of the economy, with localization of Federal business (like no other region in the country); (2) the “southern” portion of the region (generally coastal) has good economic attractiveness, in terms of weather, workforce, accessibility, tourism; (3) the outlier is the “small towns” areas (generally to the west), these are generally disadvantaged with more workforce and industry leaving and coming, and altogether less business resilience, ability to flex.  
  • Is there optimism in this economy? A: There certainly is, at the macro country level. Across all global macro-economic problems and countries, the one country with the most resilience, i.e. the U.S., will survive.  The underlying dynamics of this country compared to the rest of the world are good, from location and natural resources, to immigration, democracy and capitalism.

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