MNI INTERVIEW2: Fed's Barkin-Tamping Inflation Will Take Time

Bringing high U.S. inflation down to more acceptable levels will take time because the economy is still booming, employment is robust and supply chain issues are taking longer than expected to get resolved, Richmond Fed President Thomas Barkin told MNI.

“I think it's going to take us a while to get inflation under control and that's one of the reasons why I'm supportive of that accelerated rate increase path that we talked about,” Barkin told MNI’s FedSpeak podcast, saying he would not rule out a larger 75 basis point rate hike if inflation expectations look to be getting out of hand.

“Demand is still extremely strong,” he said. “I don't see any quieting in that yet.”

Barkin said business contacts in the Fed’s 5th district expect inflation pressures to persist. "People would like the supply chain stuff to to get solved but it's just taking longer and longer and longer and it's sort of like whack-a-mole, the latest issues of course being the Ukraine and being the shutdown in China."

BROAD-BASED

One the difficulties with tamping inflation, which has surged to a 40-year high of 8.5%, is that price pressures have broadened as supply chain issues clashed with increased demand due to fiscal and monetary support following the pandemic.

“A lot of us thought a year ago that this was about getting chips in cars, and as soon as we got chips in cars inflation would ease,” Barkin said. “What we've seen, of course, is that it's much broader than that. And the longer that you have elevated inflation, the higher the risk that firms and consumers are going to think that inflation is going to stay elevated. That informs my forward-leaning, look on normalizing rates."

Still, he’s encouraged that business managers' price setting habits do not yet reveal a deeper inflationary psychology.

“You ask them, what kind of pricing power do you think you're going to have a year from now? They have not yet convinced themselves that this pricing power is continuous or long lasting,” he said. “They do not see this as a long-term regime change. They see this as a shorter term thing that we're gonna get to the other side of at this point.”

NO RECESSION

He pointed to the April employment report, which showed a larger-than-expected gain of 428,000 jobs, as a further sign that labor market conditions are very tight. Even some of the labor shortages that have characterized much of the pandemic might be easing for some sectors as parts of the economy return to normalcy, he said.

“The amount of noise I hear from businesses is less today than it was five or six months ago,” he said. “It was almost desperation five or six months ago, and today it has eased up. I think it's that you have seen a big rise in participation, particularly in the lower end of the workforce. And so the hospitality sector is one that I'm hearing a lot less noise from.”

Barkin said he’s surprised by all the chatter about recession risks in financial markets and in the business community, attributing the worries to understandable concerns about the high levels of uncertainty associated with a period of higher inflation and the Fed’s efforts to rein it in.

“We've got a long time before we do something that throws us into a recession but I understand why people are concerned about it,” he said. "We're still well under neutral."

“People certainly worry that the path to control inflation will require the Fed going into restrictive territory, and that that could cause a recession. I'll just remind everybody that the Fed hasn't been that restrictive in a very long time.”