Richmond Fed president says economy may face 'inflationary headwinds'

ARLINGTON — With Northern Virginia fearful of losing federal jobs, Tom Barkin says business leaders shouldn't forget about inflation.

Barkin, president and CEO of the Federal Reserve Bank in Richmond, delivered a message of caution here on Wednesday — as he did the previous day in South Richmond — about the potential for shift in the economic forecast in the face of new tariffs President Donald Trump imposed on international trade, a labor force shrinking from declining birth dates and reduced immigration, and budget deficits rising from a combination of potential federal tax cuts and government spending.

"All these trends suggest we could see our tailwinds replaced by inflationary headwinds," he told the Northern Virginia Chamber Annual Economic Outlook, held at the Schar School of Government and Policy at George Mason University.

Barkin isn't the only one seeing those potential headwinds. On Monday, the University of Michigan reported a sharp decline in consumer sentiment across all measures from January to February, with long-term inflation expectations showing their largest monthly increase in four years.

The imposition of tariffs on U.S. trading partners — and the likelihood of retaliatory tariffs on exports — is driving those expectations and raising doubts about the Federal Reserve Board lowering interest rates again this year, said Kent Engelke, chief economic strategist and managing director at Capitol Securities Management Inc. in Richmond.

"I do believe inflationary pressures are increasing," Engelke said in an interview on Wednesday. "I do believe tariffs are inflationary. I do not believe inflationary expectations are being factored into the markets. We're ignoring them."

It wasn't supposed to be this way. The Federal Open Market Committee, on which Barkin sits, reduced the overnight lending rate by a full percentage point last year after raising it aggressively over the previous two years to bring down inflation, which peaked in June 2022 as the COVID-19 pandemic gradually waned. Engelke said bond markets have already factored in expectations for two interest rate cuts by the end of the year, despite rising concern about inflation.

Barkin urged caution and patience to prevent inflation from rebounding, as it did in the 1970s, when he said the Federal Reserve backed off its monetary policy pressure too soon.

"The challenge we have is uncertainty," he said, citing, among other questions, "how all the policy changes in Washington affect the economy."

In Northern Virginia, the policy changes Trump made in his first month back in the White House have stoked fear in a regional economy tied closely to the federal government workforce and spending. Both are under intense attack by the president and his billionaire ally, Elon Musk, at the Department of Government Efficiency, or DOGE.

After Trump created DOGE by executive order after his inauguration on Jan. 20, "my stock fell 35% in four weeks," said Toni Townes-Whitley, chief executive officer at SAIC, based in Reston, with nearly 25,000 employees and 6,000 in Virginia.

"This is a precipitous, vertical drop that we have to acknowledge," Townes-Whitley said, predicting, "in the next 18 to 24 months, we're going to take a hit."

Other executives on the Northern Virginia chamber panel were more optimistic about the region's ability to bounce back.

"I expect a short-term decline; I expect a medium- to long-term recovery," said Jeff Whitaker, president and CEO of Chevy Chase Trust. "I expect it to be rocky along the way."

The housing challenge

Panel members see the cuts in the federal workforce as opportunities for them to hire talented, displaced government employees. They also see challenges in a region where workers are returning to offices after working remotely, but the cost of housing in the region has become increasingly unaffordable.

"It is a big challenge in this area," said Laura Ipsen, president and CEO of Ellucian, a higher education technology company in Reston.

Barkin, whose bank covers a region that extends from the Carolinas to Maryland, Washington, D.C., and part of West Virginia, said he sees North Carolina and South Carolina meeting the challenge in a way that Virginia is not — by building new housing. "I would encourage local governments to be thinking hard about the ... development of housing," he said.

But the panel said that meeting business demands for a skilled workforce won't be easy because of the mismatch between available jobs and skills. Demoralized federal workers who lose their jobs under the Trump administration may not be willing to stay in the region because of how they are being treated, said Townes-Whitley of SAIC, a major contractor for federal agencies in defense and national security.

"Government workers are not just feeling restructured — they're feeling attacked," she said.

Del. Vivian Watts, D-Fairfax, who attended the meeting, said Townes-Whitley was right on target by addressing "the cloud that is over us."

Watts is a member of the Virginia Emergency Committee on the Impacts of Federal Workforce and Funding Reductions, which House Speaker Don Scott, D-Portsmouth, formed this month in response to the cuts Trump and Musk are seeking.

She said Gov. Glenn Youngkin's new initiative, announced this week, to match available jobs with federal employees and contractors who lose their jobs "had nothing to do with the quality of workforce that was being addressed by that panel."

"You don't denounce your workforce," Watts said. "You value your workforce."

Barkin said after the meeting that the reduction in the Northern Virginia workforce would be "disinflationary," but his message to the Rotary Club of Richmond the previous day also underscored the uncertainty facing Virginia's economy

"His tone was not a fearful one," said Pam Kelleher, Rotary president and development director at the Central Virginia Legal Aid Society. "His tone was we should be concerned."