Tom Barkin (4:11)

So I know Wharton has like a joint cpa, jd, MBA program. Did you, Were you enrolled as a full time JD and a full time MBA student at Harvard, or were these, was this sort of a combined program?

Barry Ritholtz (4:24)

It is a combined program. You take a year at law school, a year at business school, and two years combined. I didn't realize there was a program where you could also get a cpa. Maybe that would have been a third degree just for extra credit.

Tom Barkin (4:35)

I believe that's Wharton. So you come out of Cambridge with 3 degrees. What's the first, first job you take?

Barry Ritholtz (4:43)

I went to work at McKinsey.

Tom Barkin (4:44)

I mean, that was literally your first. So you go to work in McKinsey in 87 and you stay for 30 years.

Barry Ritholtz (4:51)

Yeah, and I, I was lucky, lucky, lucky to go there. I joined an office that had about 25 people in Atlanta, Felt like an entrepreneurial opportunity to build something. Made a lot of friends there, enjoyed the work, really enjoyed my clients and the opportunity to help a bunch of great leaders improve the performance of their organizations. Fell in love with McKinsey people, smart, talented, idealistic. And the combination just worked great for me.

Tom Barkin (5:17)

You've held a number of roles there, eventually becoming a senior partner. But the two that are most fascinating and relevant to your current situation is chief Risk officer and chief Financial Officer. Tell us a little bit about the career path to two very important roles at a very important company.

Barry Ritholtz (5:38)

Well, starting in 99, I started leading the Atlanta office, which eventually became the Southern offices of McKinsey. So from Texas through Virginia, it was sort of our territory. And we had. I don't remember the number 60, 70, 80 partners, plus another several hundred associates. And we were serving clients in that geography. So I'll point to that as a role that I really enjoyed and one where I got to spend so much time with so many business people about what was happening in their business and opportunities for McKinsey to help. We worked our way through 9 11. That was a very difficult time for our business. And I think coming out of it, the folks at McKinsey thought, you know, I knew how to manage a bottom line. And our office got through quite nicely. And when a new managing partner was named around the financial crisis, they asked me to be the CFO to help navigate McKinsey through that, which I'm very, you know, pleased with how well we navigated through that. I did that for six years and then spent three years trying to help institutionalize some risk processes at McKinsey, including a lot of the stuff that has been done to defend against cyber and in whatever role. And there are others that I'm not going to bore you with. You know, the opportunity to try to take a partnership and influence it to become better is a challenge and also a lot of fun.

Tom Barkin (6:57)

That sounds really interesting. So you're at McKinsey for three decades. How do you end up on the Richmond Federal Reserve?

Barry Ritholtz (7:07)

First of all, I was very involved civically in Atlanta and. And lots of different organizations. And at some point I met the president, my equivalent in Atlanta, who then was Dennis Lockhart, who's a great guy. And Dennis at some point invited me to join his board. From so from 09 to 14, I was on the board, and then eventually the chair of the board of the Atlanta Fed, and I stepped down, term limited. And three years later, I was in the process of leaving McKinsey. McKinsey has a mandatory retirement age. I'm very young in my own mind, but not that young at McKinsey. And I had signed the papers and agreed to retire. And I got a call from a headhunter suggesting that I interview for the Richmond job. And of course, I called Dennis and asked if he thought this made sense. And, you know, he encouraged me to do it. And so for me, it just seemed like a great opportunity to. Well, let me take a step back. I've really been impressed with The Atlanta fed from 09 to 14 and the federal Reserve in general, navigating through the financial crisis. All the innovations that happened in the early 2000 and tens. It reawakened an interest in economics that I'd had since being an undergrad. But I never thought that that's a job I would do. It just didn't occur to me until the combination of the headhunter and Dennis encouraged me to do it. And then I interviewed and was offered the job.

Tom Barkin (8:27)

So maybe, perhaps this is a touch of Hindsight bias, but 30 years at McKinsey Cybersecurity Chief risk officer, chief financial officer, the.com implosion, September 11, the financial crisis. Sounds like you're tailor made to be sitting on the Fed. That just never popped into your, into your mind. Like what was the moment that you said, oh, I have skills that seem to apply to this.

Barry Ritholtz (8:56)

You know, you describe me as a very modest person. I'm not sure that's true, but I'll just say, I'll just say that I was so impressed with the grounding and the experience of the people who make monetary policy that it wouldn't have occurred to me that, you know, I should go stick my hand up and do that. And even when you walk into the room of the FOMC, you've got 19 people there, they're very impressive. Probably two thirds are academic economists. They've spent their entire career working and studying in that. And of course I had taken four years of economics, you know, 40 years, well, I guess 35 years earlier. And so I think it would have been, you know, pretty arrogant to imagine that that would place, that was natural for me. Now, you know, when I got into the process and started thinking about it, you know, I was able to articulate a model for how I thought I could add value to the room. And I think, you know, if you're performance oriented or even competitive, what you really want to do is add value to whatever job you've got. And so for that job, for this job, you know, I, I asked myself what could I do that would be valuable? And what I thought I can do and what I spend my days doing is trying to understand what's actually happening on the ground with businesses, because that's what I did for 30 years. I think that's a differential skill within the FOMC because anyone can tell you they're raising prices or lowering prices. But to understand why and how things are going to play out and to spend enough time with people and feel comfortable enough with their businesses that you could understand the context that is behind whatever choices they're making. I think that is a place where I can add real value. And I, I convinced myself that, and, and I guess I convinced the board that as well.

Tom Barkin (10:39)

You know, people often talk about how much they wish the government was run more like a business, and for better or worse, that it doesn't always apply. But it really feels like the Federal Reserve is sort of halfway between a private sector entity and a full governmental agency. Almost has a foot in each camp. Tell us how your private sector experience helped to drive Fed policy and especially at the Richmond Fed, how it affects just the everyday operation of a large, influential central bank like that regional central bank.

Barry Ritholtz (11:20)

Well, let me start by saying one of the things that was very attractive to me about the Federal Reserve when I got to know it in Atlanta was these banks are private sector entities, which means you have, you know, a value proposition to highly talented people who have freedom to, to work hard and do what they know is right. But in addition, you've got very mission oriented people. So very talented and very mission oriented. That's a nice combination for, for something that's working for the public interest. And so I, I was, that was definitely an attraction to me. I'm not trying to mess that up. So I'm not coming in and saying, all right, now, you know, here's what we're going to do. Because I was in the private sector, you know, I'm actually, I respect the institution and trying to figure out how to operate within it as opposed to disrupt it. And so operationally, the Richmond Fed oversees technology for the system. And I obviously saw technology in my old life. And so, you know, making sure we're better and working better and delivering better. I think we've done a great job in that. I'm also chairing the committee that oversees payments within the Federal Reserve, which is the one business the Federal Reserve runs, and trying to make that a good and even better business. Those are. There are places I bring my business skills to bear, talent management, all of that stuff. In addition, as I said, I think being able to bring some insight, for example, on how businesses are going to behave in the context of volatility and tariff announcements, that's something that I think I can bring. My business experience has a lot of benefit in the room, and it's good to just say that you bring that benefit. But I try to reinforce that by spending literally five days a week, Tom, in the market, talking to businesses throughout my district, trying to truly dig into what's happening I think that's a place I can also add value.

Tom Barkin (13:09)

So you joined the Fed in 2018 and it was a very consequential seven years Q4 of 2018. People were very nervous about a recession. Market dropped about 20% in the quarter, some of which was related to tariff induced slowdowns back then 2020, obviously the pandemic. Once in a generation, maybe even once in a hundred years. Event 2022 first, not only is the fastest rate increase in modern memory, first time, I want to say since 80, 81, 82 where both stocks and bonds down double digits, that was 2022 and then 2025, obviously all this volatility and sturm and drang with with tariffs. What is the biggest occupier of your mental bandwidth? Is it the day to day operations or is it all of these seemingly unprecedented disruptions that just turn the whole world upside down? Whether it's just a quarter like it was in 2018 or a couple of years like the pandemic.

Barry Ritholtz (14:19)

Well, so I joke sometimes. I was on the board of the Atlanta Fed from 09 to 15 and during that six year period, interest rates did not change once.

Tom Barkin (14:27)

Nothing happened.

Barry Ritholtz (14:29)

Right. And, and look at where we've been here from you know, raising it in 2018 to lowering it in 2019 to really lowering it in 2020, then to raising it again in 2022 and then lowering it again.

Tom Barkin (14:39)

Are you saying it's your fault since you joined the Fed, everything went upside down?

Barry Ritholtz (14:43)

I'll take whatever credit or fault you want. I would say the thing I've been reflecting on is the question of did we in our working careers just benefit from a period that with hindsight was an unbelievably low volatility period? The wall fell. While there were conflicts globally, there weren't very many. 9, 11 felt like a big deal at the time, but Lehman Brothers was obviously a big deal. But over a 30 year period it's pretty calm. And stat I like to throw out there is in the 2010s, inflation was between 1 and 2% every single cycle. We added jobs every month. In the 2000 and tens, GDP was in the very narrow range of sort of 2 to 3%. We just had a very stable long term expansion with very low inflation. And that was a very friendly environment, you know, I'd say for policymakers, but maybe that if you look at, you know, through the sands of time, that kind of stability is not what you should expect. And so we've had significant volatility. The pandemic Obviously being an example, the inflation episode being another one. And maybe that's going to be more like reality.

Tom Barkin (15:51)

You know, it's so funny you say that. We did a study in House and looked at the 15 year period from the financial crisis forward. So somewhere in the middle of last year was the third best 15 year rolling period on record. You have to look at the 15 years post World War II and then the 15 years up until late 99, which were 18 and 17% a year respectively. The 15 year period ending last year was 16% annually. And all anybody did was complain about, or at least a lot of market participants complained about. The Fed, complained about deficits, complained about the economy. It's the single best decade and a half in modern era for asset prices. So in the face of that sort of, you know, criticism of the Fed and carping about all sorts of policy, how do members of the fomc, how do members of the Fed respond when the data says, hey, things are pretty good, but the sentiment, which continues to just get worse and worse, says things are terrible?

Barry Ritholtz (17:00)

Well, I'd start to the people who complain, I'll start by saying we're given a privilege by Congress, which is the ability and the independence to set monetary policy on behalf of the economy of this country. And we take that very seriously. I do think part of the trade there is that people on both sides get to critique what we do and that just is what it is. And I think you just keep your head down and do the job you've been assigned and you don't spend time worrying about the critiques. So that's that part of it. In terms of uncertainty and volatility, I think in sentiment it's quite pronounced. Now. I think business sentiment and consumer sentiment's different. I mean, business sentiment feels to me like very tied to outcomes. If businesses are highly uncertain, they're not going to invest, they're not going to hire, they're going to defer growth plans. We saw that in 2019, as you referenced earlier. I think we're seeing that right now. Certainly the businesses I'm talking to, I've described it as trying to drive through a really dense fog. It's hard to put your foot on the gas because you don't know where the next cliff is. You don't want to put your foot on the brake because you don't know who's behind you. And so the only rational strategy is to pull over and put on the hazards. And that's what I hear businesses doing, which is pulling and pulling over the hazards, pulling over and putting on the hazards. Now it's different on the consumer side. Historically, consumer sentiment has been a leading indicator of consumer spending. But we didn't see that two or three years ago when consumer sentiment got negative and consumer sentence got very negative again recently. I think the reason we haven't seen that is inflation. It turns out, I mean, we all knew this in the 70s, but we've all relearned it in the last three years. It turns out consumers really hate inflation now. It doesn't stop them from spending. You know, if your wages go up and your prices go up, you have the same spending capability, but you're just much less happy. And that's what we've seen. And I think today we'll see if we have more inflation. But I think the kind of relentless noise about tariffs is leading people to think that that's going to lead to higher prices, which is leading people to be more negative about their expectations. And you can see that in the expectations. Let's say one year, price expectations have elevated significantly and that's what's driving sentiment. But so far that doesn't seem to be affecting spending on the consumer side. I think it does on the business side.

Tom Barkin (19:14)

Yeah, very much. Businesses have to plan much longer term. I, first of all, I love the foggy metaphor. Driving in the fog is really perfect. But you mentioned inflation expectations and I always wonder, does the Fed put too much emphasis on expectations, at least in the modern era? If we look at 20, 21, 2022, inflation expectations were at their lowest just as inflation spiked. And of course they were at their highest just as inflation peaked in 22 and began coming down. My experience with sentiment is it's always backward looking. You ask people how they feel about anything, the markets, the economy, inflation, and they're always telling you, here's what the past six months have been like. Even if you say, what do you see going forward? How much, how significant, how important are inflation expectations to FOMC policy?

Barry Ritholtz (20:12)

Well, I think the theory is very straightforward, which is that if inflation expectations long term in particular stay anchored, then that means that, you know, businesses will quickly return, even after inflationary episode, to prior levels of price increases. I really believe in it. I mean, in my business experience, I think the expectations of what inflation would be absolutely governed how businesses behaved both in terms of their pricing and their wage setting. You know, if you showed up at your retailer with a 8% price increase and inflation was 2%, they would say, why are you doing that? And if you didn't have the world's greatest reason, you weren't even walking in the door. And so I think the concept of inflation expectations is a very powerful concept. I really believe in it and I believe it's what happens in, in the world. What I don't believe is that we have any good way to measure it. And so, you know, you talked about market based inflation expectations. There's a lot going on in those market based expectations, including liquidity and a bunch of other things. You know, survey based expectations. It turns out, you know, if you ask someone a survey question and you bias it in any way, then they end up with different biases and different surveys have different ways of managing that. And so I think it really matters. But I don't think our metrics are very good. And my, my shorthand for whatever it's worth is I think there are two competing things in every business's mind and every consumer's mind about inflation. One is what is it today? Because the best indicator of tomorrow is today. And the second is do you trust the Fed will return it to 2% in the long term? And it's almost that simple a question. And as long as you trust the Fed in the long term and market expectations are reasonable proxy for that, then I think what you should expect for near term inflation is some combination of today versus tomorrow and you get there over time. And if you go back to the 80s and 90s after Volcker and through Greenspan, we didn't go to 2% inflation in 1986 or 87 or 88. We were at 4 and then we were at 3 and a half and then we were at 3 and then we're at 2 and a half. I think you get there over time. You don't get there quite as quickly as sort of a purist model would suggest.

Tom Barkin (22:29)

So let me get a little wonky with you since you brought up the 2% target. Former federal Reserve Vice Chairman Roger Ferguson, I believe, did a paper on the 2% inflation target and he was kind of critical of it, saying it's a made up round number that comes from New Zealand in the 1980s. It's not relevant to a modern era versus it was. But to kind of flesh out his thoughts a little more, hey, the post financial crisis period, really the post 911 period, was driven in large part by very low monetary policy, very low rates. And then the pandemic led to the single biggest fiscal stimulus, at least as a percentage of GDP since World War II. So we had that regime change from monetary to fiscal Is 2% still the right target? We couldn't get up to 2% during the 2010s where deflation was a bigger concern. Now we have the okay, admittedly the pig is mostly through the python, but we still have all this fiscal stimulus around. Is 2%, like why? Why two? Why not two and a half or three?

Barry Ritholtz (23:42)

So I would ask the first question is, is it a good idea to have a target? And I'd want to make the case that it's a really good idea to have a target because it anchors the public in terms of where you're trying to go and it builds commitment and credibility among the fomc that you'll take the initiatives you need to take when you're absent from a target. In terms of what should the target be? The original debate in the 90s was actually between zero and two. Zero was price stability. That's price stability, right? And, and two was an alternative that gave you a little bit of room. Eventually they settled on two, our predecessors. And as you were suggesting, pretty much every central bank in the world has settled on two. And by the way, we've delivered two or just around two for almost all of the last 30 years. And so it doesn't strike me that it's a ridiculous target. It's an achievable target, it's a global target. It makes sense to people. By the way, we're at 2.3%, I think headline right now, so we're not even very far away from it. So I see no reason to move the target. Of course, you could argue about whether two's the right number or 2.2 or 1.8 or some other number. I'll say two things about that. One is one of the reasons why you go with two as opposed to zero is you don't like deflation. Deflation is when prices go down every year and then no one wants to buy anything because it's going to be cheaper tomorrow. And two gives you a little bit of room against deflation. It's also the case that there's some mismeasurement. Take encyclopedias, for example. Let's assume encyclopedias were in the index in the 90s. Well, they're free today. They're on your phone. And so that's deflation. That doesn't show up in the numbers. And so it just gives you a little bit of room there. So that's why two, you know, you sort of said we're not at two today. We weren't at two a decade ago. And I think I personally do think of false precision as being a concept worth considering here, which is I definitely didn't criticize myself that much when we were at 1.8. I mean, you're trying to get to 2. The economy is not something that you manage so finely that in each and every month of each and every year, inflation comes in at exactly two. That's something that doesn't exist. Two is a target. And if you're off to on the above or on the below, you try to manage yourself toward it and you recognize that you're not always going to be right on it.

Tom Barkin (25:53)

Right. It reminds me of the old joke economists use decimal points to reveal they have a sense of humor. So. Right.

Barry Ritholtz (26:00)

Something has to. Something has to make that case.

Tom Barkin (26:03)

So, so let's pivot a little bit to to the Richmond Federal Reserve. The the Federal Reserve bank of Richmond district covers South Carolina, North Carolina, Virginia, D.C. west Virginia and Maryland. That seems like a fairly unique group of states, especially with the nation's capital right in the middle of the Tell us a little bit about what makes that region so special.

Barry Ritholtz (26:30)

So three things I like about it. One is DC Metro unique. There's no other place in the country like that, obviously, and all that's implied there. Second is we have nine or ten I'll call them really fast growth, new south regions, communities, cities, Charlotte, Greenville, Raleigh, Richmond. You know, you put Northern Virginia, they're really very, very vibrant, fast growing. You know, north and South Carolina, for example, are two of the four fastest growing states in terms of population, in terms of housing growth over the last several years. And then you've got a lot of rural markets. And that would be, you know, west, the Appalachian part of the district in North Carolina, West Virginia and Western Virginia. But that would also include up and down. You know, i95 there are a lot of small towns there. And so I kind of think about it as three different economies. And I think it's very interesting to be able to represent a community with three so very different economies.

Tom Barkin (27:31)

You know, ETF volumes tend to go up in a crisis situation. You know, when the going gets tough, they get going. Why? Because they are a source of liquidity when other things are not that liquid. Which is exactly why the SEC sort of sketched the ETF design out back in 1988 after the black Black Mondays.

Tom Barkin (27:50)

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Tom Barkin (28:47)

You know, you mentioned Charlotte. My office has, you know, we have dozens of offices across the country, but we have three hubs, New York, Chicago and Charlotte. And every time I visit Charlotte, it feels like the city is twice the size it was a year earlier. The the area it's become a finance center and a banking center. How do you look at such a diverse area where some parts are a little more rural, a little more sleepy, and growth is just normal agricultural progression and other areas are just absolute boom towns?

Barry Ritholtz (29:23)

Well, the biggest thing I try to do is show up in all of them. And so you go to a lot.

Tom Barkin (29:27)

Of parts of your district all the time, right?

Barry Ritholtz (29:30)

Everywhere. And if you're bored on the website, they've even got a map, kind of a Where's Waldo. But no, every, I mean, last week I was in Marion and Roanoke, Virginia, then I was in Arlington, Virginia, then I was in D.C. and I'm trying to get into the big cities and the small towns because you actually do hear about the economy differently in big cities versus small towns. For example, labor markets. The labor markets in the small towns are unbelievably stressed still. And if you have a national conversation, you say, hey, the labor market's sort of imbalanced, unemployment's 4.2%, wage growth sort of moderate. It's still the case in these small towns that they can't find workers at restaurants and certainly in, in manufacturing facilities. You also hear, you know, you get a lot easier access to small businesses when you're in the small town. So when I was in Marion last week, I actually spent an hour and a half just wandering up and down Main street and I talked to every small business on Main street about, you know, what does demand look like? Are you seeing any impact from tariffs? What are you going to do with your pricing? So it's a forcing device to help you see that part of the economy, which of course, employs so many. And so I think if you're on the ground, you'll see, and I've got red parts and blue parts and purple parts of the districts. You hear what's on people's minds in very different ways based on, based on where you are. And I really appreciate that part of my district.

Tom Barkin (30:49)

How do you balance the anecdotes you hear from the man or woman in the street, the business owner, the shopkeeper, whatever, with the hard data that both the Richmond Fed and the Federal Reserve property have an enormous staff of researchers crunching numbers. How do you, how do you balance data versus anecdote?

Barry Ritholtz (31:10)

Well, so the data is better than the anecdotes because, you know, it's a bigger sample. It's done in a serious and appro. Statistically appropriate way. It also comes in about six weeks late and is revised three times. And so the data really matters. But if you just count on the data, you're going to miss turning points and you're going to miss explanations. And so I don't make the mistake of talking to one company and saying, oh, okay, everything in the data is wrong. But I do try to understand what the data is telling me by testing, you know, with the, the conversations we're having in the field. And so, you know, a good example would have been May 1st of 2020 when I talked to a real estate developer in western Virginia who was telling me that Tennessee has just opened the malls in Bristol and they're packed. And of course, Virginia was still closed down. And that was my first indicator that you're going to see this big wave of spending when the lockdowns started to open up. And so that's a turning point that you wouldn't otherwise have gotten if you weren't in the markets. We heard the same thing with household furnishings. There's a big boom in furniture during COVID but about 2022, it backed off. We heard that from the furniture manufacturers well before you saw that in the data. And then I think explanations matter a lot, too. And if you're trying to understand how it could be that we've had all this news from Washington, yet the unemployment statistics don't seem to show that much of a tick up in unemployment in Washington. Well, there are lots of explanations, including how those programs have been rolled out and what the timing of it is. And so if you're in the market talking to people, you actually understand the data in a fundamentally more sophisticated way.

Tom Barkin (32:48)

Since you mentioned the pandemic. Let's talk about two issues post pandemic, wages and real estate. And we'll just start with there have been substantial wage gains across every economic strata and impressively very much so in the bottom half of earners since the pandemic, although that is now starting to slow down. How do you look at the wage situation as part of employment and what's happening with that trend towards wage pressures beginning to ease off?

Barry Ritholtz (33:23)

Well, I do think you've described accurately what's happened to wages. It's definitely bigger increases at the lower end and less at the higher end. I should add that inflation also hits lower income earners the hardest because they spend the greatest amount of their pay. And so nobody has this mental ledger that says my wages went up X percent and my prices went up Y percent. And so I'm, you know, it's not like operating margin for a business. Those are two different ledgers in humans minds. And so to a lot of lower income people, it doesn't feel like their wages have gone up as much because inflation's gone up. And also because they don't, they discount the wages when they measured against inflation. You know, going forward, it definitely looks like we've got a labor market that is much more in balance, maybe even starting to loosen than the one we had a year or two or three years ago. You still hear tightness, as I said, in small towns, you definitely hear it in skilled trades. I think there are a set of professions out there that used to be awash with employees that now seem to be systemically short of employees and you know, a lot of that skilled trades. But I'd also put a lot of the care professions, nurses, teachers, elder care, childcare, a lot of people found those professions to be pretty unattractive during COVID and moved into other jobs and, and there hasn't been a wave to replace them and there's not that much money available to increase the compensation to account for it. So you hear shortages there, you hear shortages in state and local government still. So there's still places where the impact of the pandemic on the labor market has not yet we're not back to where we were at the beginning. And some combination of training and development of people and compensation of people is going to have to happen if we're going to staff these appropriately.

Tom Barkin (35:06)

So let's talk about remote work and both commercial real estate space and residential real estate. The US continues to have a substantial number of workers that are either hybrid or full time remote. I used to be in the city four or five days a week. Now I'm in the city two or three days a week. If you were in Bloomberg today, I would have been in Bloomberg. But it didn't make sense to come in to have a remote conversation. And the US continues to have a higher level of remote work than other similar industrialized societies like Europe. What's going on with remote work? What does this mean for Fed policy? What does this mean for a variety of different aspects? It seems to be fading as a topic, but it's still a pretty significant issue.

Barry Ritholtz (36:00)

We have flexibility we didn't know we had. That's what started. And you can't, you can't bury that. And so I think there's a whole bunch of workers and a whole bunch of days who found out that like you and like me, you could work from home this day as opposed to working somewhere else. It's also true that there's a bunch of employees who discovered that they actually prefer to be at home rather than come into the office. By the way, there's another set that would prefer to come in the office, but there's certainly a segment there. And so we're in a marketplace. People will compete it out. And there are executives who believe passionately that their business is not going to deliver unless their people are there five days a week, every week. And their businesses who believe they'll get access to better people if they just allow them to be remote. And those two, often those two are in the same sector. And so they'll compete it out. One will have lower property costs, one will have higher collaboration. We'll see. We'll see what happens. One thing I tried to look at when all this started was how do we ever end up with the five hour, five day a week, 40 hour work week? And the answer is that was General Motors and Alfred Sloan back in the mid-20s just decided it. And five or 10 years later, everybody was doing it. But none of us who were doing it thought that was perfect if we stopped to think about it. It's just what we did. And so, you know, different sectors, different businesses, they'll evolve toward different models. I do think there are implications, as you say, on, on real estate, on the residential side, if some set of people are going to spend more of their time in their house, then they're going to value their house more, they're going to value their office, they're going to value their space, their garden, whatever. And so, and we saw that during COVID people got shut up in their house. They decided they no longer like their house. They also decided they didn't like the roommates. And so the economists call that household formation. So you have a lot more households out there for the same amount of houses. And that's what's led to the price increase that we've had in housing. And unless we build a lot more housing, you're going to have that out there for some time. It's a bigger part of the basket. And maybe, you know, public transit or parking is a lower part of the basket, but housing will be a bigger part of the basket. On the commercial real estate side, you know, folks are still trying to adapt and you know, it's much less flexible than the housing side because some of the space is very much built for purpose, built for an institution at least for 15 years, as you know. And so I think we're still midway through an adjustment process where some amount of that commercial real estate is used more because people come back to the office, some is redeployed into other uses, whether it be, you know, anything from data centers to residential, and some is eventually taken off the market. But I think we're still very much mid process on that.

Tom Barkin (38:39)

So let's talk a little bit about real estate and in particular residential real estate. We seem to have this chicken and egg problem where prices are up because there's so little supply on the market. And while some of that is a little bit of nimby and some of that has been post financial crisis builders tilted towards multifamily and apartments versus single family homes. But the largest chunk seems to be the golden mortgage handcuffs. Something like 60, 70% of people have mortgages under 5% and some huge crazy number under 4% mortgage rates. So on the one hand, if we lower inflate yields too fast, well, that could set off another round of inflation. On the other hand, all of this supply is locked up and either we're going to wait for those people to age out or if rates come down enough, they could trade up or trade to a downsize or whatever, but move to a different property. How does the Fed think about this sort of conundrum where damned if you do, damned if you don't.

Barry Ritholtz (39:52)

Well, I think I do buy your story that there are a lot of people who have decided not to move because they can't give up their mortgage. But I don't buy the story that if all we did was lower rates, then they would all give up their mortgage and the housing market would free up because every one of those people who Moved is a seller and a buyer. And so they're going to be increasing their demand at the same time that they're increasing supply. So you're still going to have a shortage of supply versus demand. I should also note that just because we raise lower short term rates doesn't necessarily lower mortgage rates, as we learned in the fourth quarter of last year. But, but, but I think again, the demand for housing is much higher. And it's much higher because the generations decide they want a house and household formation, as I talked about earlier, and people valuing their house. As you say, we underbuilt housing for a generation coming out of the Great Recession. And so we have more demand than supply. The answer to that is to build more supply. And as in my district, if you drive down 95 and you look at Wilson or Smithfield or Clayton or Rocky Mount, you know, these are exurban areas that are not Raleigh, but not that far from Raleigh. You see, you know, development after development of 275 to $325,000 houses, you know, going up in what used to be farmland there. If you drive to exurb in Charlotte or Greenville or Richmond, you'll see the same thing. I mean, houses are getting built, but there are communities, you know, Metro DC would be one of them, where you don't see housing getting built. And so, you know, you have to ask the question of why. That is part of its cost, part of its land, and part of its, you know, resistance to growth by the inhabitants of various markets. And it, again, one of the benefits of having the six states I have is you can see places that are growing and housing is getting built and you can see places where it's not.

Tom Barkin (41:42)

So is it fair to say the, the headwind for putting up more houses is not a national set of policies, but mostly state, local, regional, both regulations and just, hey, you know, they, the fewer houses that are built, the more my house is worth. There's a little bit of self interest amongst the people who oppose more home construction.

Barry Ritholtz (42:09)

Well, what I keep saying is we're in a competition for developers. There are only so many, there are only so many construction people and you want them to come to your neighborhood and build houses in your places. So how do you do that? Well, all of your local regulation and policies matter. Permitting, zoning, amount of time to get approvals, certainty as to construction time. So that's one big piece of it. Another big piece of it is land availability. And once you start thinking about land availability, you almost don't stop. I mean, I drive into some community colleges and they've got huge plots of land and then I find out that the state doesn't allow the building of dorms on community college campuses. And you go now, okay, wait a second, you can get student housing built. Why can't we get that built? You go to some of these older rural towns that have been depopulated over the years and they've got all this land that's dilapidated housing, but they can't fix it because there's absentee landowners. I mean, once you start thinking about the role of land in making this attractive for developers, you almost can't stop thinking about it. And I think that really is the lever of communities can, you know, provide real assurance that they can provide land and that land can get built on at a predictable and reasonable time period. I think then it works.

Tom Barkin (43:21)

Really, really interesting. You know, ETF volumes tend to go up in a crisis situation. You know, when the going gets tough, they get going. Why? Because they are a source of liquidity when other things are not that liquid. Which is exactly why the SEC sort of sketched the ETF design out back in 1988 after the black Monday. Hear more about the evolution of ETFs.

Tom Barkin (43:44)

And their growing influence on portfolios.

Barry Ritholtz (43:47)

Tune in to PGym's the Out Thinking.

Tom Barkin (43:50)

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Tom Barkin (44:38)

So now let's pivot to your work on the FOMC and the state of monetary policy today. Starting with. Let's talk a little bit about that fiscal stimulus during COVID If you total all the programs up, CARES Act 1 and 2 under President Trump, CARES Act 3 under President Biden, the infrastructure bill, all the other 10 year legislative acts that pass some form of fiscal stimulus, you know you could get that up to about $4 trillion or more. That's a huge Huge amount of money coursing through the system. How did that impact inflation? And is it fair to say that maybe transitory has gotten a bad rap? Because it seemed to be kind of transitory. It just transitory took longer than everybody expected.

Barry Ritholtz (45:33)

Well, there's been a lot of papers written about what drove the inflation. You know, to me, it's in all of the above. I mean, you had a surge in demand that came from fiscal policy and monetary policy and vaccines. You know, as people got out of their house and felt the freedom to spend. You had constraints in supply which came from, you know, labor constraints, people driven by the, by the health crisis, maybe labor constraints caused by policy and supply chain constraints as demands sort of overwhelm supply. And so then you saw, you know, demand surge, well, in excess of supply that led prices up. I think the most interesting question for monetary policy is why did it last so long? Because, you know, to your point on transitory, okay, that's fine. You have more demand than supply. Expectations are anchored. So price went up, they should have come back down. And I just think it goes back to what I described earlier, is how I think about people's inflation expectations, which is, it's part today and part tomorrow. And it just takes time to get back to tomorrow after you've had a surge today. The real life way to think about it is, okay, now you're somebody's lawn service and you don't really have big cost increases, but everybody else has raised their price. Maybe you look around, you go, huh, maybe I can raise my price. And so there's a lot of attempts to raise prices that go through in the aftermath of an inflationary episode that might not have been. They might not have the courage to do without an inflationary episode. And so I think it was this. The inflation wave that we saw was definitely time bound. I mean, we have seen the supply chains heal. We have seen people back in the workforce, and we have seen prices come down. But the question of what the definition of transitory is is challenging because the word first got used, I think, in March 21 or April 21, and now it's four years later. And so a lot of people think transitory means like a minute, where in fact, the original meaning of it was in our lifetimes. And so probably the right definition is somewhere between those two.

Tom Barkin (47:33)

On a long enough timeline, everything is transitory. You have a quote from earlier this year that I'm a big fan of because I have a buddy who's a commodities trader and he says the exact same thing all the time. And the quote is the cure for high prices is high prices. Explain that because I'm just such a fan of that, that line.

Barry Ritholtz (47:55)

Well, so it's a, it's a great economist line. It has two meanings and both of them matter. One is that if you as a consumer get high prices, the first thing you want to do is look for an alternative. Maybe you go to private label, maybe you go to from beef to chicken, maybe you go from a department store to a Walmart, but you're looking for some alternative. And so if a company raises its prices too high, then its customers are going to do something else. And that'll teach the company that that price is too high. The other version of it is a supply side point which is that if prices are high and successfully passed on, then new competitors will come in, you know, to either increase capacity or lower prices. And so, and I really want to say this has happened. I mean this has happened in, in this economy. If you look at earnings reports from all the major retailers, you know, you'll hear this. You know, customers are tapped out, customers are trading down. You can see a big move in terms of where people are buying their groceries today. Private label, E commerce, like I said, beef to chicken, all these things are happening. And I think it's because, you know, consumers having gotten through the COVID period where they were exhausted, it was all coming at once. And by the way, they had lots of money because of repressed spendings during COVID or elevated stock market or stimulus checks. They just spent it and they paid it. And that's why we got the inflation in 2022. We're not in a period where consumers feel like they have extra money. And so those people who are out there trying to raise prices for whatever set of good or bad reasons, they're facing a consumer that doesn't want to pay it now and has got the time and the mental energy to make choices. And so I think, you know, that does that will fix high prices over time.

Tom Barkin (49:35)

So during the pandemic we kind of pivoted from a service driven economy to very much a stuck at home, can't travel, go to restaurants, go to sporting events, so we're going to consume more goods. That very much was a key driver of inflation along with all these other issues including including snarled supply chains. Feels like that's mostly returned back to normal. The summer of revenge travel. Everybody seems to be out and about, at least in my area. I book restaurant reservations three weeks in advance. So we seem to be in A place that's kind of normalized. How is the FOMC looking at the state of the economy today? Are we in a normal post inflation environment or is there something else that we going on that we should be aware of?

Barry Ritholtz (50:29)

Well, I think there's today and tomorrow. Today we're in the closing stages of bringing the economy back to normal. That's how I put it. I mean unemployment's 4.2, that's a historically low number. Inflation headline 2.3, that's very close to a 2% target. GDP if you adjust for the one timers that were in the first quarter is still growing in the two and a half percent range. So think of it as a very strong stable economy. The challenge we all have is the uncertainty about where we're headed. And you or I could articulate a upside to that or a downside to that. I'm not making a comment on it, but it is elevated uncertainty. It's what I was describing as the fog. And so we're sort of on the brink of a different environment. In that different environment will have different tariff rates, different levels of immigration and different levels of government spending and different levels of regulation and different energy policy. All that is I think locked in. I mean we know the direction, we just don't know the destination. And it turns out people kind of want to know where they're headed before they pack. And so that's the challenge we've got right now is just determining what's the destination so that, you know, businesses and consumers can make the choices they make.

Tom Barkin (51:46)

So given this fog driven in large part by uncertainty over tariffs, how does the FOMC make policy if there's such a lack of clarity as to, we understand today, but really tariffs are on, tariffs are off. Wait, European tariffs, oh wait, we're going to put them on hold until mid July. That must be incredibly challenging to make long term policy decisions in light of these very short term policy swings.

Barry Ritholtz (52:19)

I'd say sometimes our job is very straightforward and sometimes it's not. It's very straightforward when unemployment's high and inflation's low because you know which direction to go. And it's, you know, relatively straightforward when the forecast seems pretty clear that you have stability and confidence in the forecast. You know, in today's world neither one of those is true. I mean inflation has come down but is not yet at our target employment, unemployment is low, but there are risks to it and the forecast is unclear. And so you have to reflect on where you are. Where I think we are is Modestly restrictive. In other words, a 4.3% overnight rate is constrained the economy a modest amount, but not a significant amount at a time where inflation is still over our target and unemployment is low. And then you just have to, I mean, you could choose, if you had conviction in the forecast, then you might choose to move whichever way you felt you had to move given that forecast. But if, like me, you don't have that much conviction in the forecast, then you say, let's wait and see where we go.

Tom Barkin (53:19)

So let's talk about conviction. Another quote of yours that I'm fond of is monetary policy. And I'm going to paraphrase, monetary policy needs to balance both conviction and humility. Discuss.

Barry Ritholtz (53:33)

Well, my dad said, used to say, tom, I want you to be humble because I know you well and you have a lot to be humble about. And I think the point he was making is don't be too full of yourself here. And so you could, you know, stand up, pound the table and say, you know, by God, I see where this is going and inflation's rising or unemployment's rising, and therefore we need to move, you know, left or move right in support of one of those parts of our mandate. I mean, I listen to my colleagues who have many different points of view on this. I'm humble enough about my own forecasting ability. It just makes me think that, you know, I'll learn more. I'll learn more with time.

Tom Barkin (54:13)

So talking about your colleagues and the rest of the folks on the FOMC board, one of the things I've noticed through history is that they are very deliberate. They don't surprise the markets with anything. Everything is always very calculated. And hey, we're going to be raising rates in a few months. Hey, next month, look at the dot plot. We're looking at PC and cpi. Okay, here it comes. There are never shocks to the market at the same time. The criticism has been, seems to be a little late to the party sometimes. We saw that spike of inflation late 2020, early 21. It took the Fed a while before they began raising rates. And then CPI peaked June 2022. Took a while before we went on to pause and then cutting. How do you balance the lack of clarity, the need for humility with the latest noisy data and trying to be not too far behind what you're actually is happening on the ground.

Barry Ritholtz (55:24)

Well, so you started with, you know, being methodical and that's probably accurate. Bernanke had the insight, which he published back in the early 2000s, that markets can do a Lot of work for us. If they have a good sense of the path, then we don't have to do as much in policy because they'll, you know, work the right path for you. And I think there is some effort made to try to communicate clearly, certainly why, you know, I and my peers try to talk as much as we do to see if we can't, you know, bring some clarity to that situation. And so I think it's fair to say, you know, trying to do it. But we will move faster than people expect when we need to, as we proved in 2022 in terms of getting it right. I'll just go back to what I said about false precision a little bit ago, which is, I think we're always going to be wrong. I mean, you know, you're never going to precisely, you know, get the peak of inflation or the peak of unemployment or the trough of either. You make your best efforts. And I think if the standard is that, you know, every decimal on every forecast actually played out, then I think we're all guilty of missing that.

Tom Barkin (56:30)

Yeah. To say, say the very least. We talked earlier about transitory. Let's talk for a moment about the 1970s, which was clearly very structural. How similar are the 2000-20s to the 1970s and how different are they? As someone who was a kid during that era, I kind of remember just being parents being freaked out about stuff. I remember going to get gas. I had a little side business mowing lawns and the guy at the gas station asked me, do you have an even license plate or an odd license plate? I don't know. I'm 12. I just need a gallon of gas to mow the lawn. So how, how similar is, is, are the 2020s and what are the key differences?

Barry Ritholtz (57:15)

Well, so there's a chart that makes the rounds that, you know, adjusts the scales, but sort of puts the 60s and 70s up against, you know, the last five years and says there's just about to be another big bout of inflation. And, you know, I find that chart annoying, but, you know, I understand the fear. A reminder for all your listeners that in the early 70s there's a strong historic sense that there was a set of mistakes made by the Fed of not being tough enough on inflation that were then exacerbated in the middle and late 70s by 2 big oil spike price spikes. And I can't predict an oil price spike and neither can anybody else. And so who knows how that'll play out. The fact that I've found interesting about the 70s is how elevated long term bond rates were and how high the term premium was and basically how much inflation expectations were embedded in long term rates. And that's an interesting thing to look at because it sort of gets to this question of expectations. We had price shocks like the oil price spike in 74 or the one in 78, and who knows whether we'll have those again. But those price shocks didn't just affect today's prices, it also affected the market's views on tomorrow's prices. And I say, I would just say that's a huge difference between the 70s and today's, that, you know, metrics of long term expectations feel, you know, very grounded even if you do have short term price spikes. I think that's because of an expectation that the Fed will do what we need to do if you were to see that inflation, which I hope we validated in 2022.

Tom Barkin (58:51)

So it seems like the Street, Wall street in particular, Wall street and the bond market in particular, Tom, have been erroneously forecasting Fed rate cuts for, I don't know, two, three, maybe even almost back to when the Fed started raising rates this cycle. What is the Fed looking for in order to feel comfortable? Okay, we've, we've wrestled inflation into submission and the economy is starting to show a little signs of some minor stress. Let, let's take rates down one or two more times. I'm not asking you for a date, I'm asking you for, what are you looking at? What is the FOMC looking at that would make them comfortable saying, all right, we could, we could ease a little bit off the break and, and tap the accelerator a little bit.

Barry Ritholtz (59:42)

Okay, so first of all, I wouldn't be so tough on the professional forecasters. Another joke is that, you know, economic forecasting was created to make weather forecasting look good.

Tom Barkin (59:51)

I, I heard it to make, to make astrologists look good. But another, and actually the weather forecasters are getting better and better.

Barry Ritholtz (59:59)

That's the difference, as are the economics. But whenever, whenever you look at the market quote, unquote, market's view on the number of rate cuts, you have to remember that in that assessment includes tail risks. And so, you know, if you think at any given point in time there's a 20 or 25% of a recession, at which point the Fed might, you know, respond, then that's embedded in that. So when the, you know, the, the SEP forecast has two rate cuts, let's say, and the market has three. I'm not sure I view that as a difference. I just think one's got. One's a modal and one's a weighted average. And I think those aren't the same things. Just in defense of economic forecasters.

Tom Barkin (60:41)

But if we look, you know, look at 23, 24, 25, sometimes they're different, sometimes they're different and wildly different.

Barry Ritholtz (60:49)

I was going to say, in terms of your other question, what would I want to see? You'd want to see inflation sustainably under control, or you'd want to see the economy tipping to a level that that amount of downturn would have an impact on inflation and bring it under control. And so you can get inflation under control through rates and you can get it through economic. You prefer to do it through rates. But we'll see.

Tom Barkin (61:10)

And I only have you for another two minutes, so let me throw you a curveball. Quick question. Okay, I was just out in La Jolla on Torrey Pines. I know you're an avid golfer in your Federal Reserve district. What are some of your favorite courses? I used to be on the USGA board. I'm assuming you still play. Where do you like to play in? What's your home course?

Barry Ritholtz (61:35)

I play Kidlock in Richmond, and we have a place in Pawley's island where I play the debit club, which is a p die course down there. And thank you for mentioning, you know, golf. Golf is a lot like monetary policy and that I wish I were better at both of them.

Tom Barkin (61:51)

Well, that's the perfect quote on which to end this. Thank you, Tom, for being so generous with your time. We have been speaking with Tom Barkin. He is president and CEO of the Richmond Federal Reserve bank, as well as a member of the Federal Open Market Committee that helps set Federal Reserve rates. If you enjoy this conversation, well, be sure and check out any of the 546 we've done since 2013. You can find those at Bloomberg, iTunes, Spotify, YouTube, wherever you find your favorite podcasts. I would be remiss if I not thank the crack team that helps me put these conversations together. My audio engineer is Steve Gonzalez. Anna Luke is my producer. Sean Russo is my researcher. Sage Bauman is the head of podcasts at Bloomberg. Be sure and check out my new book, how not to Invest the Ideas, Numbers and Behaviors that Destroys wealth and how to Avoid Them Wherever you buy your favorite audio e and hardcover books. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.

Tom Barkin (63:11)

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