Barkin: Fed 'leaning against the wind' to curb inflation

"We believed inflation was temporary. ..." the Richmond Fed president said in Prince William County. "But inflation didn't fade as we had expected."

The president of the <a href="https://www.richmondfed.org/" target="_blank">Federal Reserve Bank in Richmond</a> isn't ready to say the winds have shifted in the economy's favor in the effort to curb inflation, at least not enough to alter the Fed's strategy of gradually raising interest rates to bring down consumer prices.

In the first of a pair of recent speeches, <a href="https://www.richmondfed.org/about_us/our_leadership_governance/tom_barkin" target="_blank">Fed President Tom Barkin</a> told a business audience in Prince William County on Friday that it is "premature" to say the U.S. economy faces a recession, but also warned not to expect a drop in inflation to be "immediate nor predictable."

Speaking to a different audience at a technology conference in Atlanta on Monday, Barkin said forces that have lowered prices in the past - e-commerce, automation and energy technology, for example - could return to drive down consumer costs, but likely not in the short term.

"As a result, our efforts to stabilize inflation expectations could require periods where we tighten monetary policy more than has been our recent pattern," Barkin said at the Technology-Enabled Disruption Conference. "You might think of this as leaning against the wind."

What that means to consumers, businesses and investors is that the Fed remains on course to raise its overnight interest rate again in early November, as financial markets already expect, as it reverses a monetary policy that he said mistakenly viewed inflation as "transitory" a year ago. The Fed has already raised the rate by a cumulative 3 percentage points.

"I think it is great that the Fed is now finally acknowledging that its aggressive monetary policy is a major cause for today's inflation," said Kent Engelke, chief economic strategist at Capitol Securities Management in Richmond.

In his speech to the Prince William Chamber of Commerce on Friday, Barkin attributed the increase in inflation to a confluence of factors, including the Fed board's monetary policy to stabilize the U.S. economy during the COVID-19 pandemic.

"We believed inflation was temporary. ... History taught us not to overreact to short-lived supply shocks - it usually doesn't make sense to constrain an economy to fight a shock that will go away on its own," he said. "But inflation didn't fade as we had expected."

Barkin said the Fed's monetary policy wasn't the only factor driving inflation. The most obvious were global supply chain disruptions, most notably because of the pandemic and the Russian invasion of Ukraine, as well as $6 trillion in emergency spending to weather the COVID-19 crisis and stimulate the economy.

"With perfect hindsight, it would have made sense to have ended asset purchases and raised rates earlier," he said last week. "But sick workers would still have had to stay home. Car manufacturers would still have been short [semiconductor] chips. Russian oil and Ukrainian wheat supplies would still have been disrupted."

Engelke called the discussion of money supply "the best part of the speech," but he also cautioned against underestimating the effects of rising rents and wages, as well as a decline in labor force participation that the Richmond Fed noted last week has been lagging, particularly in Virginia and Maryland.

The hope, expressed in Barkin's speech in Atlanta, is that prices will drop in the face of e-commerce that accelerated during the pandemic, new technologies for energy exploration and labor productivity, and the potential for remote work to increase "supply of labor for certain jobs and thereby reduce wages."

"But what if we are in a new era, one in which we face inflationary headwinds?" he asked.

His answer is that the Fed will continue to "lean against the wind," maintaining its long-term goal of keeping inflation at 2%, but with the target averaged between periods of higher and lower prices.

"We will need to be crystal clear that a growing economy and maximum employment require stable prices and that we will remain committed to addressing inflationary gusts," Barkin said.

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