This article is a transcript of the latest speech by Tom Barkin, President of the Federal Reserve Bank of Richmond. As a rotating voting member of the Federal Open Market Committee (FOMC) for 2026, Barkin is a hawkish and prudent official at the Fed, consistently prioritizing inflation control and maintaining a cautious and patient attitude towards interest rate cuts. He advocates for maintaining a moderately tight monetary policy and opposes premature easing. In recent rounds of interest rate decisions, he has consistently supported maintaining high interest rates and not rushing into a rate-cutting cycle. His analytical style, based on economic resilience and wary of inflation stickiness, makes his interpretation of the multiple paradoxical puzzles of the US economy highly valuable for policy reference. The current US economy exhibits many seemingly contradictory and difficult-to-interpret characteristics, with core indicators showing mixed signals, concealing multiple economic mysteries worthy of in-depth investigation. Key Takeaways If you're also passionate about solving mysteries, you'll undoubtedly be curious about the current state of the US economy. Why is the US economy so resilient amidst multiple shocks? The core answer lies in household consumption. Household consumption accounts for nearly 70% of US GDP, and even with a turbulent environment, consumer demand remains strong. Why is corporate investment still booming despite the uncertain macroeconomic environment? The driving force isn't just data center construction. Many corporate executives have stated that high uncertainty is now the norm, and companies can no longer afford to continue waiting and seeing. Despite a constant stream of negative news, the unemployment rate remains low. What's the underlying logic? On one hand, the market has long exhibited a pattern of "fewer hires, fewer layoffs" in its employment structure; on the other hand, while the growth rate of labor demand has slowed, the growth rate of labor supply has also declined, creating a delicate balance. The core of the inflation puzzle isn't whether inflation can fall back to the 2% policy target. The Federal Open Market Committee (FOMC) has clearly stated its commitment to pushing inflation towards the target and has ample policy tools at its disposal. Thank you to the organizers for the enthusiastic introduction, and thank you all for the invitation today. Wishing everyone a wonderful summer, whether you're spending time with family, celebrating the 250th anniversary of the founding of the United States, watching the World Cup, or simply enjoying the cool air conditioning. This summer, I spent time with my family on vacation at the South Carolina beach. For me, summer means spending time with my children, facing the sea, and reading a mystery novel. If you also enjoy mystery novels, then the current US economy is a perfect unsolved case. Today, I will dissect four major economic mysteries and share my current assessments, hoping these analyses won't be as "too simplistic" as Sherlock Holmes described. I also look forward to hearing your opinions, and if I have missed any key clues, please feel free to point them out. Please note in advance: This statement represents only my personal views and does not represent the position of the Federal Open Market Committee (FOMC) or other officials in the Federal Reserve system. Mystery One: Why is the Economy So Resilient? The first mystery is the unexpected resilience of the US economy. In recent years, the US economy has faced numerous challenges: the COVID-19 pandemic, global supply chain disruptions, high inflation and interest rate hikes, Russia's special military operation against Ukraine, conflicts in various parts of the Middle East, and various tariff barriers—the impacts are countless. These risks have left a deep mark: current inflation remains higher than policy targets; real income has shrunk over the past year; the University of Michigan Consumer Sentiment Index hit three monthly lows in its 70-year history; and various traditional recession warning indicators have repeatedly released risk signals for years. Even so, economic activity has maintained an expansionary trend. Since 2023, the average annual growth rate of US real GDP has reached 2.5%, higher than the long-term potential growth center. This year's sharp rise in gasoline prices could have been the final straw that broke the camel's back, but the market was almost unaffected, demand remained robust, and the unemployment rate even further declined. Faced with a series of negative shocks, why has the US economy been able to stabilize? The core support comes from household consumption. Household consumption accounts for nearly 70% of GDP, and even with a turbulent external environment, residents' willingness to consume has not contracted. I believe that people's consumption mentality has undergone a fundamental change. In the aftermath of the Great Recession, many who lost their homes, vehicles, and jobs focused on increasing savings and cutting back on spending to prioritize building financial security. However, in the wake of the pandemic, people generally adopted a "live for the moment" mentality—unexpected events could strike at any time, so it's better to enjoy life while it lasts. So what sustains consumer spending? First, the vast majority of people still have jobs. The US unemployment rate was as low as 4.1% in July, maintaining at 4.5% or below for 58 consecutive months, a record high. Layoffs were also at a low level, with initial jobless claims in July hitting a 50-year low. Stable employment means people don't need to drastically cut spending. Second, the wealth of high-income groups continues to expand. Residents who own real estate and stocks have seen significant asset appreciation in recent years, and this group contributes the majority of total consumption. Finally, ordinary people with limited incomes are also finding ways to maintain consumption. They are turning to affordable private-label brands and discount supermarkets; adjusting their spending patterns, moderately overdrawing future income; buying used cars and choosing to repair old items rather than replace them; reducing or even canceling various commercial insurance policies; reducing savings and drawing on existing deposits; and carefully planning installment payments. In short, while people are constantly tightening their financial buffers and cash flow, consumer spending has not stopped. Mystery Two: Corporate Investment Remains High The second major mystery is the robust performance of corporate fixed asset investment. The various unstable factors mentioned earlier should have suppressed corporate investment: rising energy and imported goods costs, higher borrowing rates, and frequent supply chain disruptions. I once compared corporate decision-making in a highly uncertain environment to driving in dense fog: accelerating makes it impossible to see the road ahead, while braking suddenly risks being rear-ended, so one can only pull over, turn on hazard lights, and observe. In 2025, most companies were in this situation, waiting for the market fog to clear. Even today, market uncertainty has not subsided: the outlook for tariff policies is unclear, the Middle East conflict continues, and financing costs remain high. However, in the first half of 2026, the annualized growth rate of US private non-residential fixed real investment reached 9.5%. Compared to the stable decade before the pandemic, the average growth rate during the same period was only 5.8%. Under such pressure, why is corporate investment still so hot? The most direct driving force is the artificial intelligence (AI) sector. The scale of related investments is beyond imagination: earlier this year, the total amount of AI planned investment announced in a single week approached $700 billion. Some institutions have estimated that the overall investment in AI is comparable to the 19th-century US railroad infrastructure boom. This round of investment is almost unaffected by interest rates, construction costs, and market uncertainties, with continued strong industry demand. The investment boom is not only concentrated in data centers, but also shows expansion momentum in all industries: banks have ample project reserves, mergers and acquisitions are active, factory leasing contracts are constantly being signed, physical factories are being established at an accelerated pace, and the defense industry is booming. Many corporate executives have given a consistent judgment: high uncertainty has become the new normal in the market, and companies can no longer wait and see for a long time. On the one hand, corporate profitability is improving, providing sufficient confidence and financial support for investment. In the second quarter, the overall corporate profit increased by more than 30% year-on-year, and if large cloud service providers are included, the increase exceeded 50%; institutions continue to raise their profit expectations for the next quarter, and corporate leverage ratios have fallen significantly compared to 2020. Behind this profitability resilience is a significant rebound in productivity growth. Although the market is discussing the empowering role of AI, I believe that the core driver of productivity improvement at this stage is the continued tight labor supply after the pandemic. After experiencing the shock of labor shortages, companies proactively deployed automation, optimized staffing, and streamlined operational processes, and are now reaping the benefits of transformation. Mystery Three: The Resilience of the Labor Market This leads to the third mystery: the stable performance of the labor market. News reports frequently claim that AI will massively replace human labor, making it difficult for many recent graduates to find jobs. The latest employment data shows a net decrease of 23,000 non-farm payroll jobs, yet the unemployment rate continues to decline. With negative news everywhere, why is the unemployment rate remaining low? The market's hiring scale has indeed shrunk significantly, with the current hiring rate falling back to 2013 levels. A survey of CFOs conducted by the Federal Reserve, the Atlanta Fed, and Duke University shows that only 37% of companies are hiring for new positions, and less than 60% are only filling vacancies. Affected by high uncertainty, companies are still cautiously controlling their hiring scale to avoid excessive expansion, mainly relying on natural attrition to control the total number of employees. At the same time, companies are actively testing AI tools, attempting to use technology to complete business and reduce manpower needs. However, companies rarely proactively lay off employees. In the aforementioned survey, less than 6% of companies implemented layoffs. With stable end-user demand, businesses need manpower to support their operations. Having relied on natural attrition to downsize for years, companies have no surplus personnel to lay off. While the market is generally concerned about a wave of AI layoffs, most AI application scenarios, except for programmers and customer service positions, cannot directly reduce staff. Coupled with improved corporate profitability, companies are also subjectively trying to avoid large-scale layoffs, and the profit buffer reduces the economic pressure of layoffs. In addition to the "fewer hires, fewer layoffs" employment characteristic, the low unemployment rate stems from a delicate balance: while the growth rate of labor demand is slowing, the labor supply is contracting simultaneously. The annual net immigration to the United States has declined significantly, decreasing by a cumulative 2.4 million people from 2024 to 2026; population aging continues to intensify, with the proportion of people aged 65 and over exceeding 20%. The baby boomer generation is retiring en masse, with an average of nearly 2 million people leaving the labor market each year for the past three years. The decrease in new jobs, coupled with the shrinking job market, ultimately lowers the unemployment rate. Puzzle Four: The Tortuous Path to Inflation The fourth puzzle is the recurring rebound in inflation. In June 2022, personal consumption expenditure (PCE) inflation peaked at 7.2%. After the Federal Reserve began its rate hike cycle, inflation fell to the 2%-3% range at the beginning of last year, briefly appearing to be moving closer to the policy target. However, subsequent tariffs, international oil price shocks, and large-scale investment in the AI industry boosting demand led to a rebound in inflation. In June, overall PCE inflation was 3.7%, and core PCE inflation was 3.3%. The core of the inflation puzzle is not whether inflation can fall back to the 2% target. The Federal Open Market Committee has clearly committed to achieving this goal, and the Fed has ample monetary policy tools. The real unresolved issue is the path of inflation decline: does the Fed need to raise interest rates further, or has current inflation already developed its own downward momentum? Optimists believe that current inflation has entered a downward channel. This round of inflationary pressure is largely driven by temporary external shocks, and the pressure will eventually subside: tariff policies are gradually stabilizing, the Middle East conflict is expected to ease, and the data center investment boom will eventually cool down; productivity gains from AI are expected to keep costs and prices low in the long term; wage growth pressures are moderate; market inflation expectations remain stable; and current interest rates have a tightening effect, sufficient to gradually suppress inflation. However, opposing viewpoints point out that the current inflationary pressures have become inherently sticky: supply chain bottlenecks may persist for a long time; if the AI investment boom continues, industrial expansion may further push up prices, exacerbating inflation; and persistently higher-than-target inflation may prompt businesses and residents to raise their long-term price expectations. If this logic holds true, the market will need additional policy support to push inflation back to the 2% target. This downward force may come from end-user demand. Many consumer-facing businesses report difficulty in passing on costs to downstream customers, and consumers are extremely price-sensitive. If the underlying support for consumption, such as household income and asset prices, weakens, end-user bargaining power will further compress the room for price increases by businesses. If the cooling effect on the demand side is insufficient, the Federal Reserve will still need to implement tightening policies to assist in cooling down the market. You are probably curious about the fifth question: How will the Federal Open Market Committee adjust its policy next? Unfortunately, I will not reveal the answer in advance today. I consistently refrain from predicting policy paths; I will continue to gather clues—both listening to firsthand feedback from business operators present here and tracking various macroeconomic data—to continuously refine my judgment of the economic situation. Thank you.