MNI: Barkin Says Fed Will Persist Until Inflation Comes Down

The Federal Reserve will continue to raise interest rates and shrink its balance sheet but it may take time to bring inflation down, Richmond Fed President Tom Barkin said Friday in a speech.

"One of the key lessons from the ‘70s was not to declare victory prematurely. Perhaps we will get help from supply chain and energy market normalization," he said, without giving a view of what kind of rate hike he'd prefer at the next meeting. "But we have the tools to bring inflation down, even if those disruptions continue."

"Our rate and balance sheet moves take time to bring inflation down. But the Fed will persist until they do," he said, also suggesting he doesn't see a recession on the horizon. "While there is a lot of talk about a recession, the strength of the labor market suggests that is still premature."

Most of the speech focused on drivers of inflation as the Fed's preferred metric, the Personal Consumption Expenditures Price Index, is 6.2% headline and 4.9% core.

"It’s part COVID and supply imbalances. It’s part fiscal. And it’s part monetary," said Barkin. "Movements in any of these factors could have quieted inflation somewhat. But I’m not convinced any one of them is the whole story. For me, it’s the accumulation of so many inflationary pressures at once that likely tells the tale. In football terms, we flooded the zone."

The Richmond Fed president noted his concerns that continuing significant U.S. deficits run the risk of unanchoring inflation expectations. "If people believe government has lost its will to control spending, they could conclude that it has no option but to inflate its way out of its debt burden," he said.

St. Louis Fed economist Mark Wright told MNI this week it's still too soon to say whether inflation has peaked.

TEMPORARY PRICING POWER

"The question is how long this can last. Persistence is the essence of inflation," he said. "When I talk to business leaders, they still view their increased pricing power as temporary. They see it as an episode, not a regime change."

Long-term market measures of inflation compensation, derived from TIPS indices, remain in line with the Fed's 2% target despite short-term inflation and inflation expectations at multidecade highs, he said.

Employers are short workers, he said, primarily due to lower immigration and excess retirements. "Employers are struggling with productivity as they try to train new workers."

"We’ve been through multiple shocks, as I’ve discussed, and significant shocks simply take time to dampen," he said.