Richmond Fed’s Tom Barkin on the Surprisingly Resilient Real Economy

In this conversation at Jackson Hole, Tom Barkin, President of the Richmond Federal Reserve Bank, reflects on Chair Kevin Warsh's recent speech describing the economy as solid but inflation as moving in the wrong direction. Barkin aligns with Warsh's assessment while noting the policy challenge: the economy remains resilient despite headwinds that would typically slow growth.

On consumer spending resilience, Barkin provides a compelling explanation comparing the current environment to the post-COVID period. Unlike the Great Recession where consumers faced destroyed savings and lost assets requiring years of rebuild, COVID created a different dynamic: stimulus, accumulated money from reduced spending, increased equity and home values, and a mindset of determined spending. Barkin describes consumers engaging in creative financial strategies to maintain consumption—shifting to private label brands and Walmart, living at home to save on rent, deferring car payments to maintain vehicles, and timing bill payments strategically. This systematic de-saving, combined with continued job security and market health, sustains spending despite inflation and rising prices.

On AI and productivity, Barkin notes that while AI generates significant political interest and concerns about data centers, jobs, and water resources, actual productivity impacts remain concentrated in specific areas like call centers and programming. The current productivity boom stems primarily from 2022-era automation investments when firms faced labor shortages. AI's most significant economic impact is on hiring behavior—companies hesitate to hire, wondering if AI can fill roles instead. This restraint on hiring is where Barkin sees AI's primary economic relevance currently.

Regarding the 65-month inflation debate, Barkin presents two perspectives: a harsh 65-month view attributing persistent inflation to Fed errors, or a more nuanced 47-month plus 18-month view arguing inflation was brought down through 2025, then shocked back up by external factors (AI, tariffs, oil prices), with remediation ongoing. He frames this as a genuine policy debate without declaring victor.

On housing, Barkin expects eventual market tightening as demographic demand meets constrained supply. However, he cautions against over-parsing inflation data by component, preferring to view inflation holistically across the basket of goods and services rather than cherry-picking favorable subcategories.

The tariff discussion reveals nuanced pass-through dynamics: B2B companies report successfully passing tariffs through to customers; B2C companies face stronger consumer resistance, especially those serving lower-income customers through major retailers. Big box retailers are holding the line on prices for consumers, creating margin pressure that's partially offset by productivity gains with minimal wage pressure.

On data centers, Barkin acknowledges they generate significant local political tension despite economic development benefits. Data centers provide tax revenue but relatively few permanent jobs, lacking the employment base that keeps manufacturing plants politically popular. He suggests the backlash could become economically meaningful but notes the uncertainty around AI and data center buildout scales makes prediction difficult.

Regarding Fed communications, Barkin holds two seemingly opposing views simultaneously: transparency and credibility-building are valuable, yet excessive forward guidance can trap policymakers into suboptimal decisions (citing 2021-2022 as cautionary). He appreciates the SEP process for internal debate sharpening but acknowledges the dot plot visual overwhelms the narrative, creating false expectations (citizens believing the Fed "promised" rate cuts). He supports continuing these practices internally while reconsidering public communication methods.

Barkin emphasizes his role is synthesizing ground-level business intelligence into policy-relevant themes rather than relying on isolated anecdotes, tying observations to concrete policy questions about productivity sustainability, underlying inflation, and consumer behavior.