MNI: Fed's Barkin Sees Sticky Inflation, Policy Lags

Richmond Fed President Tom Barkin told an MNI Webcast on Thursday inflation may be harder to tame than some expect, though some effects of higher interest rates have yet to be felt.

"There's more lag to come from hikes," he said in Q&A. "I also believe that inflation is going to take longer to settle than the more optimistic forecasts that you might see. So that's my challenge: I think there's more to come and I think there's more inflation to come, so I'm just trying to balance those two."

If progress on disinflation stalls, the Fed president said he could support additional rate hikes.

"If you start seeing a return to elevated inflation, then that makes me start thinking that we need to look hard at whether we need to do more, particularly if demand is strong," he said, adding he can't call the Fed's stance sufficiently restrictive when growth came in at 4.9% last quarter. (See MNI POLICY: Fed Convinced Past Hikes' Full Effect Still To Hit)

TIGHTER FINANCIAL CONDITIONS

Barkin acknowledged that longer dated Treasury yields have retraced some gains recently after financial conditions tightened significantly since September but warned that movements in long term yields should not be compared to changes in short-term rates.

"I don't think long rates are quite useful as a policy variable," he said. "They can move pretty significantly over a relatively short time period."

The Richmond Fed president said QT is having a "modest" impact on yields and has room to run even as rates head back down toward neutral.

"If you believe that there's any value in QE, in terms of stimulating the economy, then you have to believe there's some value to QT in the economy."