MNI: Barkin Warns Recession Possible As Fed Hikes Quiet Demand

U.S. economic strength could limit the length and depth of any recession as the Fed raises interest rates to dampen demand, Federal Reserve Bank of Richmond President Thomas Barkin said Tuesday.

"I understand why some are forecasting a recession," he said in remarks prepared for a meeting of the Risk Management Association in Richmond, Va. "But the challenge in predicting a recession for tomorrow is the strength of the aggregate data today."

"We’ve been scarred by our memories of the Great Recession and the Volcker recession, but it’s worth remembering that most other recessions aren’t that long or that deep," he added.

Rates are rising "expeditiously" and the Fed has signaled there are more rate increases to come in order to contain inflation and inflation expectations, Barkin said. "We are out of balance today because stimulus-supported excess demand overwhelmed supply constrained by the pandemic and global commodity shocks."

For now, consumer spending remains "quite healthy" and supply shortages are most likely to blame for pullbacks in auto and home sales so far, he said.

How the U.S. economy will fare depends on how long pandemic effects will normalize, how high Fed raises rates and outside forces, he said, without giving specifics on the rates path.

"Barring an unanticipated event, I see rising rates stabilizing any drift in inflation expectations and in so doing, increasing real interest rates and quieting demand."