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MNI INTERVIEW:Fed's Barkin Sees 'Powerful' Disinflation Forces

MNI (Washington)
WASHINGTON (MNI)

Product and labor supply constraints are not yet feeding into permanent shifts, Richmond Fed president tells MNI.

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Richmond Fed President Tom Barkin said in an interview Wednesday that long-term inflation expectations have remained stable through the start of an economic boom triggered by Covid-19 vaccines, and there's still lots of slack in the economy to hold down prices overall.

"What I'm hearing is a real reluctance to use short-term supply chain issues to change the long-term price structure," said Barkin, a voter on the FOMC this year. "Part of that is firms haven't changed their expectations, and part of that is some of the disinflationary forces that are out there are still very powerful," such as online price transparency, he said.

Firms in the mid-Atlantic district are wary of hiking prices or wages despite surging demand, order backlogs and labor shortages, he told MNI. Survey-based and market-based and indicators of inflation expectations have "firmed toward our target but they don't seem to be running out of control," Barkin said.

Wage inflation is also being held down by high unemployment, even as some service companies have "genuine concern" over their ability to get back to full staffing, he said. "You still have 9.5 million extra people unemployed. While you see a little wage pressure in some industries you really don't see broad-based wage pressures."

Bond yields have jumped this year on concern about how policy makers will handle any burst of inflation, and some officials see overheating from fiscal stimulus that could force the Fed to tighten policy too quickly.

STRONG NEXT FEW QUARTERS

A full economic recovery requires workers to be coaxed off the sidelines and in some cases matched to new employers or new industries, and that needs bigger changes like re-opening of schools, child care support and fewer health concerns for those 55 and over, Barkin said.

"The next couple quarters seem pretty robust to me and pretty clear and after that, it's a lot murkier," Barkin said. "I hesitate to give predictions on unemployment because it depends a lot on participation, and I'm hesitant to predict out-year GDP, because it depends on the virus and on the pace of deployment of excess savings into the economy."

Barkin pointed to the employment-to-population ratio at 57.6% last month, far below the 61.1% pre-pandemic, as evidence the economy has yet to make "substantial further progress" toward full employment and price stability, the Fed's bar for beginning to wind down its USD120 billion a month in asset purchases.

"I certainly think it's possible" the economy hits that substantial progress threshold by year-end, Barkin said. "We have to see what the outcomes are" before a broader discussion on tapering or rate hikes, he said.

Asked whether returning the labor market half-way to pre-pandemic levels would constitute significant progress, Barkin replied, "That would certainly be a point where I'd hope we would be having a broad based conversation." He declined to say whether he was one of the FOMC officials who advanced his timing for a rate increase in the "dot plot" the Fed published earlier this month.

FISCAL STIMULUS IS HELPING

"What we've tried to do is to be as specific as possible while preserving the flexibility to manage the many many scenarios that could happen here, including an accelerated rollout of vaccines and elimination of virus, all the way to re-emergences like happened 1919," Barkin said.

"I'm pretty optimistic overall, but I have to make sure I'm thinking about the race between vaccine-enabled immunity and the next version of spread driven by increased interaction," he said.

As hundreds of millions of Americans become vaccinated, hospitalizations decline, and warmer weather takes hold, "you're seeing the first signs of the pent-up demand and excess savings impact that many of us have been forecasting," Barkin said.

Direct checks from the federal government had an immediate impact on spending by low and moderate income households in January and the effect this month was "more pronounced," he said. "Retailers selling to people who have gotten the checks have been blown away at the strength of their sales, and you hear that in spades."