There is a risk that U.S. businesses could convince themselves that bad times are around the corner and actually cause a downturn, said Richmond Federal Reserve President Thomas Barkin on Tuesday.
Right now, firms are frustrated with political polarization and there is a high degree of uncertainty about the outlook for government policies, Barkin said in a speech to the Greater Baltimore Committee Economic Outlook Conference.
Businesses say they’re not scaling back yet but are reluctant to “double down,” he said.
“For these reasons, I don’t discount the idea that we could talk ourselves into a recession — particularly if the uncertainty begins to affect consumer confidence and spending,” he said.
Barkin said he didn’t think a recession was imminent. “There’s no evidence that we’re faltering.”
“In other words, as long as consumers keep spending, we will be in a good place,” he said.
Barkin had a 30-year career at international management consultancy McKinsey before joining the central bank in 2018. He will not be a voting member of the Fed’s interest-rate committee until 2021.
In comments to reporters, Barkin said his business contacts are showing “some reluctance on hiring” but no “leaning forward on layoffs.”
Businesses that have significant exposure overseas are the most negative about the outlook, Barkin said.
But the U.S. has never “imported” recessions in the past. Companies that have mainly a domestic focus are less concerned, he noted.
The Richmond Fed president said he didn’t know where monetary policy would go next following the three quarter percentage point rate cuts in July, September and October.
Fed Chairman Jerome Powell has described this monetary easing as “insurance.”
“I hope we will see over the next six months the kind of impact you want to have” on that insurance policy, Barkin said.
“I think it’s a good time to pause and see where we go and see how it evolves,” he said. He said he was not saying rates were on hold for six months.
“The outlook could change for a hundred different reasons, and if it did, I’d have to stop and think about the right policy response,” Barkin said.
The Fed’s three rate cuts are aggressive and “relatively unprecedented” given the historically low unemployment rate, he said.
At the moment, the economy is giving “conflicting signals,” he said. The Fed expects a modest easing. A key question is how long uncertainty lasts.
“The recent headway made on trade negotiations may lessen our downside, as might the progress made in the Brexit negotiations,” he said.
He called on Congress and the White House to take steps to support the economy.
These steps were not just the traditional spending and taxation but efforts to create a better climate for business investment, he said.
“We’ll get the most bang for the buck if the fiscal environment is a supportive one,” he added.
Barkin said the data was signal the Fed’s next move.
“The strength of consumption and the labor market might be saying ‘hold’ or even ‘raise rates,’ while the softness of investment, inflation and the bond market might be saying ‘lower rates,’ Barkin said.
At the same time, the bond market is pessimistic but the stock market is upbeat, he noted.
“Experience says the bond market wins — but is the bond market sending us the same signals it used to when rates are so low?” he asked.
The yield on the 10-year Treasury note
was 1.836% in early trading. That’s down sharply from 3.232% just over one year ago.
Stocks were mixed on Tuesday with the Dow Jones Industrial Average
up slightly while the S&P 500 index
was down a bit.