Richmond Fed President expects inflation to be controlled over time

The president and CEO of the Richmond Federal Reserve Bank offered restrained but positive news about the country's inflation crisis to Shenandoah Valley business leaders this week.

During a Wednesday appearance at Blue Ridge Community College, Thomas Barkin said the Federal Reserve's tools such as interest rate hikes will calm the inflationary spike over time. But Barkin said not to expect immediate results.

He also said the drop in inflation could spur a recession.

"I expect inflation to come down but not immediately, not suddenly and not predictably," Barkin said. He said demand should flatten, reducing pricing pressure. Higher interest rates should slow the economy by increasing borrowing costs and lower the incentive for spending.

Barkin also said the supply chain challenges that have plagued everything from retail businesses to car dealers should ease. "Manufacturers will get chips into cars at some point and – when they do – those prices will start to normalize," he said.

While the Fed has little control over commodities such as oil and wheat, Barkin told the business leaders that during the past two months the dollar has strengthened and gasoline and the "broader range of commodities" have dropped from peak pricing levels.

In the early portion of Wednesday's speech, Barkin compared the effects on the economy of the COVID-19 pandemic to those of a war. Prior to the pandemic the U.S. economy had experienced an average gross domestic product growth of 1.5 to 3 percent per year and inflation had stayed at 1 to 2 percent, according to Barkin. That changed with the pandemic.

The most recent consumer price index was at 9.1 percent, a 40-year high. Barkin offered reasons.

"Six trillion dollars of fiscal stimulus has hit the economy. Workers have stayed home, with participation still well below pre-pandemic levels," Barkin said. "Many have died. Businesses have struggled with meeting demand as supply chains proved vulnerable to the virus and consumer spending shifted in a locked down world."

Those developments, Barkin said, were followed by post-vaccine spending by consumers and the war in Ukraine that has driven up commodity prices.

Barkin said inflation was controlled after both World War I and World War II, and said that will happen again.

"So the Fed is committed to getting inflation under control," he said. "We may or may not get help from global events and supply chains, but we have the tools, and we have the credibility with households, businesses and markets required to deliver that outcome over time and we will."

The Fed has raised interest rates 225 basis points over its past four meetings, and Barkin expects more rate hikes to come. "We are committed to returning inflation to our 2 percent target and have made clear we will do what it takes," he said.

Business leaders who heard Barkin's speech and spoke with him, were impressed.

"He was straightforward. I appreciate his candor in dealing with questions," said Robin Sullenberger, former executive director of the Shenandoah Valley Partnership and a past board member and chairman of the state board for community colleges and a former board member of GO Virginia.

Sullenberger said he appreciated Barkin's explanation of Fed actions and the impact of them. "He was candid and very descriptive," he said. He said Barkin is a "great person to ask for advice on a variety of topics."

Tom Sheets, the president of Blue Ridge Lumber in Fishersville and also involved in real estate development, said he appreciated Barkin's clear distinction about the Fed not being political.

"He made no bones about separating their (Fed) role from politics," Sheets said of Barkin. He said Barkin made it clear that interest rates will continue to rise until inflation is cut.

Sheets emerged from the speech "feeling better than going into it. There are mature and sober people looking at this (economy) instead of the inexperienced politicians," he said.