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Labor shortage, rising rates causing higher home prices, says Richmond Fed president

Construction workers swarm over a home site in the Wendell Falls subdivision in Wake County in this 2015 file photo. Finding skilled tradespeople has gotten harder and is leading to housing shortages.
Construction workers swarm over a home site in the Wendell Falls subdivision in Wake County in this 2015 file photo. Finding skilled tradespeople has gotten harder and is leading to housing shortages.

One of the most influential government officials in the country said Thursday he’s more worried about the psychological effects of the government shutdown than any immediate economic impact it might have.

“The longer these things go on, the more likely you are to impact businesses, and consumers question whether the assumptions they’ve got about the health of our system are, in fact, accurate,” said Thomas I. Barkin, who as president of the Federal Reserve Bank of Richmond is responsible for helping shape interest-rate policy and banking regulations.

Barkin — who oversees a district that includes Maryland, Virginia, North Carolina, South Carolina, Washington, D.C., and most of West Virginia — was in Raleigh on Thursday to speak at the Raleigh Chamber of Commerce’s annual economic forecast.

While Barkin noted that many individuals and government contractors will start losing paychecks this week, he said the shutdown isn’t likely to amount to a huge hit to country’s economy.

“So, I worry much more around investment climate and confidence than I do about a near-term direct impact,” he said.

Thomas Barkin is the president of the Federal Reserve Bank of Richmond. Photo courtesy of Federal Reserve Bank of Richmond

While in Raleigh, Barkin sat down with reporters to answer a wide range of questions, including on the pace of interest rake hikes and the North Carolina economy.

Barkin is a relatively new member of the Federal Reserve Board, which has come under criticism from President Donald Trump for increasing interest rates too quickly. Under the leadership of Fed Chair Jerome H. Powell, the Fed has gradually been increasing interest rates to achieve its dual mandate of maximizing employment and keeping inflation stable at 2 percent.

After hovering just above zero percent for most of the decade, the benchmark interest rate is now set to be between 2.25 percent to 2.5 percent after the Fed raised rates again last month.

When asked whether confidence in the Fed could have been shaken by such public statements directed at it by the president, Barkin said he is hopeful that the public understands its role.

“Our mandate is maximum employment with stable prices, and if you look at the numbers right now — unemployment is at 3.9 percent, inflation’s at 1.9 percent and quite stable,” he said. “And so we’re trying to do the best job we can do for the American people. ... We hope that folks understand that.”

When asked whether the Fed still needs to raise rates this year, Barkin said that he is still in favor of normalizing interest rates to the neutral rate, which is the rate where both employment isn’t harmed and inflation is kept in check.

Barkin said he doesn’t think the Fed has reached the neutral rate yet.

“We’re definitely nearing neutral, but I don’t think we’re quite at neutral,” Barkin said, though he wouldn’t say how quickly the Fed would try and reach that neutral rate.

“I think the chairman talked about being patient last week — I think patience is a virtue,” Barkin said. “I think the economy will tell us, you know, whether the time is right to go back to neutral or not.”

Barkin added that as a result of the government shut down, the amount of data the Fed has been able to receive about the economy has been halved, which makes it harder for it to keep up to date with the health of the economy.

Why homes are expensive

On the topic of the housing market, which is sensitive to rising interest rates, Barkin said a construction labor shortage is one of the biggest reasons for rising prices in the district.

A lack of labor has suppressed new supply of houses, he said.

“There’s actually much less supply than you would imagine, given the demand,” he said. “And the reason I think there’s less supply is that we are in a very tight construction market. Skilled tradespeople are very hard to find. We’re trying to get a painter at our house (in Richmond), and it’s taken us months.”

In his speech to the Raleigh Chamber, Barkin noted that since the 1990s, immigration has driven about half the growth in the labor force, and now that trend is under threat with proposals to reduce legal immigration.

Prices have also gone up, Barkin said, as interest rates are returning to more normal levels.

“As to what happens going forward, we’ll see. This year the housing market definitely slowed,” Barkin said. “If rates were to increase, that would have an impact. And if prices were to increase, that would have an impact. I do have some hope that more supply will come online and that will have a moderating impact.”

A divided NC

On his first impressions of North Carolina since taking the job, Barkin said the stark rural-urban divide in the state stands out to him.

Barkin, who was formerly a consultant in Atlanta for McKinsey & Co., has been in charge of the Fifth Federal Reserve District, which includes an office in Charlotte, since early in 2018. Since then, he has traveled across the district and noted the difference between the vibrant urban centers of Raleigh and Charlotte, which have had some of the largest growth in the country, and the rest of the state.

He said he plans to spend more time in the rural parts of the state going forward.

“The biggest thing that’s really become clear to me is the rural-urban divide,” he said. “And if you’re in Maryland, or in D.C., or even Northern Virginia, you don’t see that really.

“The labor market outcomes are just massively different if you’re in a rural area versus an urban area,” Barkin added, noting that in the region’s urban areas typically 70 percent of people are employed versus 64 percent in rural areas.

That is a “real number” and geography is influencing employment outcomes, health outcomes and wealth.

“I was living in a consultant world where I was flying into big city airports,” Barkin said. “I hadn’t spent as much time in the rural areas, and I’m going to spend a lot more over the next couple years, because I do think if we’re going to grow the economy, part of how we’re going to grow it is to get folks back to work. And again ... education’s got to be a big part of it, preparedness.”

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