Mark. It did not manage to close above that yesterday after fed chair powells testimony. We will get more of that today, and the cpi data. The twoyear yield has been bouncing around, up 1. 85 today. Stories, bathher and beyond down 4. 7 . We will see what kind of halo effect that has down 7. 47 . We will say what kind of halo effect that has. Not many analysts were looking for a great quarter from their. 60bove 60 of arable a barrel for wti on the news, including another attack. In europe, we have a green screen, but nothing huge to write home about. Of stoxx 600 up about 1 4 1 . Really taking its lead from the United States. Kidney companies as well holding those industries higher. Coming up, we have fed chair powells testimony, but first we want to get to Michael Mckee in idaho. We have a very special interview. That is all coming up next, so you dont want to miss all of that. This is bloomberg. Michael good morning to everybody on Bloomberg Television and radio worldwide. Im Michael Mckee, bloombergs International Policy course on it. Barkin of the richmond fed. Yesterday chair powell went basically markets and said we are going to cut rates in july. Did markets get the right idea . Tom i think he said the same thing weve been saying for the last month, which is we dont have Forward Guidance anymore in the memo. We are watching very carefully what is happening in the data, and we are looking very much at upside and downside risks. At this point, they are a little more tilted to the downside, which is why we are looking at that. Michael the market has basically priced in a 100 chance of a rate cut now. Can you go against the markets . Tom we have a lot of time left before the meeting. We will see what happens. Cpi came in this morning. We will get retail sales and consumer spending, and markets are smart, so if the data ends up with a different kind of outcome, the markets will adjust. Michael what is your what is your view of the economy . Tom i still feel pretty good about the economy. On the consumer side, spending is great. On the labor side, markets are still quite tight. Those are very healthy signs in our economy. What the chairman mentioned yesterday and what is clearly a concern on my mind is Business Confidence and Business Investment. The First Quarter was fine, but the indicators for the Second Quarter are less strong. Ive been asking questions about how you feel about the climate for Business Investment. Folks havent pulled back yet. I dont see folks laying folks off, cutting back existing plans, but they are also not leaning forward in the way you might, as strong as the numbers have shown in our economy. Michael you have a bit of a different background than the phd economists on the fed. You are a business you were a Business Consultant for years. What is the general feeling about the economy, and where is it going . Do they think we are headed down, or are they just really unsure . Tom confidence is very fragile. Most everyone ive talked to says this is the longest upturn in my memory, and in recorded u. S. Economic history. Its got to change at some point. Minds concern in their that things are close to changing. When you talk to them about their own businesses, with very few exceptions they are doing quite well. So today is good, but they are nervous about tomorrow. Michael what are they saying about demand Going Forward . Have they seen any kind of falloff . Tom i was with a bunch of Consumer Company cfos. They couldnt have been clearer that demand hasnt fallen at all. I was talking to businesspeople, and they will tell me demand is still quite strong. I dont see any issues on the consumer side. Manufacturing has got some challenges. If you are in the equipment parts business, for example, you might have seen a little bit of a slowdown. Thats what happens on the investment side. But 70 of the economy is consumer, and that part still seems to be quite fine. Michael jay powell kept coming back to the idea of trade. Is that what ceos are telling you . Tom i definitely think the ceos would like to have the rules of the game made clear. They understand in many cases what we are doing and why, but they want the rules made clear, and if the rules include iteris regime or free trade regime, regime include a tariff or free trade regime, thats fine. But they just are interested in knowing what is going to happen. Michael how does a rate cut fix that lacks of confidence that lack of competence . That lack of confidence . Tom a rate cut stimulus the economy in many ways, including investing by businesses. It is a pretty classic transmission vehicle. If you were to do one, and i think we shown over the last many years that if you keep rates low, it does stimulate activity in our economy in a broadbased way. I dont think it does it in a targeted way or goes after any particular issue like trade directly. Michael the other issue the fed has been concerned about is inflation, or lack thereof. From a company standpoint, what are people telling you about pricing and Pricing Power . Tom pricing is tough. When you are in a business, your Pricing Strategy is determined in part by how vibrant the market is, but in large part by the reactions of your customers, the reactions of your competitors. Tothe businesses i talked are having a very hard time passing on price. I think we have grounded expectations so well over the years and procurement departments have enhanced their capabilities so significantly over the years that i think the nose and the notion that there is any sort of big wage increase in prices coming is very low likelihood. I think we have made a permanent change in inflation dynamics. If you go back to the world i grew up in, you had labor share of content much bigger, labor unions much stronger. You didnt have the transparency thats been created by the internet. You didnt have the power of big box retailers. You didnt have procurement departments that operate with very sophisticated people. I think that does make it hard to just take incoming costs and pass them on. The businesses i talk to our thinking about different ways to create margins. You will see addon fees. You will see fewer threads in a sweater. You will see the introduction of new products at a premium price. All of those things are done by businesses to try and capture price in a world where the direct pricing vehicle doesnt work the way it used to. Guy if you cut rates, it would probably have an effect on the value of the dollar. I know the fed doesnt target the dollar, but what about companies . Do they want to see, as the president suggests, a weaker dollar to become more competitive . Do they need that . Tom i think folks with more International Exposure have a different view. In the press, theres a lot of talk about tariffs. In truth, there arent that many tariffs as a percentage of the economy. The folks who have been in tariffed Industries First of all have to decide whether it is temporary or permanent, whether it is industrywide or just hitting them. If they think it is temporary, they are more likely to just wait and see. If they think it is going to be there for a while, as many people now think is going to be the case in places like china, then they are forcing the question of what to do with their supply chain. Is industrywide, you often go to your customers and see if you cant raise price. Is in chinaly chain and somebody elses is in vietnam, youve got to move. Michael we are talking on Bloomberg Television and radio worldwide with the president of the richmond fed. Your district represent a lot of the many factoring that moved out of the south, moved to china , went to other places. How are trade wars playing their among the businesses playing there among the businesses . The administration plays it as shortterm paying for longterm gain. Are they willing to play that . Tom youve got folks who are directly affected and folks who arent. If you are not directly affected, i think people understand the idea of delivering fair trade packages, and are willing to take a little bit of uncertainty for that end, but they would like the uncertainty to be through. The folks directly affected react very much based on what is happening in their particular business. If it hits you directly, youre not happy. If it helps you directly, you are happy. Michael what do they tell you about being able to find labor . Theres been an ongoing story of people out there not well trained for the jobs we have, or in some industries we cant find the people we need. Do think the labor market is tight, and what it and it is what you hear when you talk to any business in our district. I do think there is a difference between entrylevel and more senior leaders. At the entrylevel it is supertight. You are seeing difficulty finding people, whether it is construction workers, truck drivers, nurses, waitstaff. Your seeing wages increased quite significantly in that population. In the higher end, while it is also tight, investments that businesses have made over the last 10 or 15 years in Worker Experience have led to turnover that hasnt quite been as high as you might expect given the strength of the economy. People are willing to wait a month or two or three to find the right person in marketing or finance or someplace like that. Where you really feel the tightness is at the entrylevel, and in particular in places like construction. Michael do you think a rate cut helps because even if demand increases, Companies Might not be able to fill it . Tom one of the things we are watching very closely is are there still people on the sidelines of a Strong Economy that will still come in . I was in South Carolina the last couple of days, a small town in my district, trying to understand what would it take to bring more workers in off of the sidelines. A little bit of the answer to your question comes in. How many people are there on the sidelines who could still come in . Michael where can they find them . Are people taking more than one job . Are they cutting back on production because they cant meet demand because they dont have the people . Tom it depends on the industry. If you are in a production job or you really need the people, i think people are paying enough to get those people. Where they are not paying enough is in the jobs where you can hold it together for a month or two or three, and they are delaying that sort of thing. But any manufacturing facilities, people are hiring what they can hire. With skilled labor, you cant create somebody overnight. I do talk to construction folks who are increasing their pipeline, their backlog, instead of doubling down on today. That is probably good for them in the longerterm, but it limits the growth somewhat today. Michael if we are coming up against the limits of the labor force, the only other way to get potential growth up is to increase productivity, but we dont seem to be seeing that really happen. Our companies not investing . Do they think theres not enough game to be had yet . Tom the numbers are more positive on productivity than you just said. The First Quarter number was extremely strong. If you look on a oneyear or twoyear basis, you see productivity in the upper ones were low up or ones or low twos, which is strong on a relative basis. I am quite interested in productivity because i think Growth Matters for our economy. I do think this issue of the climate for Business Investment and Business Confidence is a critical piece of this message. Policymakerso as and all parts of the government to create stability and a sense of confidence so that businesses can invest, so we can innovate and get more productive, that is critical for us. Guy a lot of ceos saying thats what they michael a lot of ceos saying thats what they want to do, or they want to manage where they are . Tom i think if i come back to the ceo mindset, they do very much want to invest in their businesses, but theyve also been through the great recession. They are a little bit scarred. They know that you dont want to be caught leaning too far forward if things are going to go south. They are very interested in following closely what is going to happen. Folks have said this year, what im doing is managing my customer mix. Im going to trade out some of the lower profit customers for higher profit customers instead of expanding in the next facility. That doesnt mean thats what they are going to do next year. Thats just where they are today. Michael a couple of questions about the mechanics around the fed. The Balance Sheet rundown is expected to go down for september down through september, and that gradually tightens policy. If you cut rates, they would be working across purposes. Would you change the schedule for Balance Sheet wind down . Tom if we decide to do something to do if we decide to do something with rates, im sure we would have that conversation. Im concerned that what weve done on the Balance Sheet hasnt do an effect, but if we decide to do some thing with rates, of course we will have that conversation. Michael the economy is not in bad shape, and you said you are relatively optimistic, and yet the markets are suggesting that there is something wrong that needs to be addressed by the central bank. January,olicy pivot in the so call powell put the socalled powell put, set in place that if markets stomp their feet loud enough, the fed has to respond . Tom i try to stay close to the data and figure out what we can do to help sustain expansion as much as we can. When we got to january of this year, it seemed pretty clear there were a set of uncertainties. You will remove the government shutdown, the international markets, and some credit spreads in the markets that meant we probably shouldnt be sending a message that we are on an unmanaged path to ever higher rates. That is what we did based on all of that data. I think that was a sensible thing to do. Think ifral would not i were in the markets that we wake up every day just making sure youre going to be happy. That doesnt feel like the right way to go. I certainly spend my time focusing on the Economic Data, not the markets. Michael how do the ceos see it . Are they following the markets closely . Do they worry about what kind of reaction you get on wall street . Or do you find more longtermism these days . Morei think they are much focused on their sector, their customers, their clients, their competitors, their business. To the extent of that what happens in the markets affects ther business, they will credit, stock price, they arm interested in that, but for them and may be for me, they understand that markets go down. They are trying to think through that cycle rather than react to it. Michael the president saying not so nice things about jay powell and people. If you tried and you all. If he tried to fire or demote the chairman, how would you react to that . Tom as jay said yesterday, we are going to stay focused. I expect that is not going to happen, and i hope and expect we will do the right job for the economy the same way weve been trying to do. Go,ael before we let you chairman powell will start in a few moments. Maybe there are some senators watching now as they prepare their questions. What should we know that maybe we dont think about, about the open Market Committee deliberations, and how you are thinking about the economy . Tom i hope that you know this, but just great seriousness of purpose in the preparation and in the room. Youve got 17 people in the room. They are all thoughtful. They all bring a different perspective. Theres two days of listening extremely hard to what one another does, and decisions are taken not in the heat of the moment, but after really deep and sober reflection. We are all just trying to do our best here, and we appreciate to the senators the support they give us. Michael and if you cut rates, 25 or 50 . Is it better to go stronger sooner . Tom lets visit that when we come. I think we will see in the next three weeks consumer spending, retail sales, pce. We saw cpi today. Theres a lot of important data to come. Lets see what the situation is when we have to make that decision. Michael all right, thank you very much. Thebarkin, president of Federal Reserve bank in richmond. I will send it back to you. Vonnie and thanks to you, bloombergs Michael Mckee, International Economics and politics correspondent. One of the things that stood out to me was that barkin said a rate cut doesnt stimulate the economy in many ways and is an mechanism. How much stimulus will you really get from a cut over the next year . Primarily because Interest Rates are already so low. Things like fiveyear notes and tenure notes and mortgage rates. Mortgage rates have come down quite substantially, where now you have is again people refinancing their mortgages that they took out just a couple of years ago thanks to those low Interest Rates. One thing that i cut could do is solidify the idea that those Interest Rates will stay low, and that could be what stimulates the economy and gets people borrowing more money in order to do things like capital investment, which mike had asked president barkin about quite effectively. Vonnie the other point about the mechanics of what is going on at the fed is that the Balance Sheet rundown will be done by september, and michael about thed tom barkin Balance Sheet rundown and suddenly an Interest Rate cut. He seemed to think that because he was ne