Barkin: Inflation Risks Outweigh Employment Risks
In a Tuesday address to the CFA Society Baltimore, Richmond Fed President Tom Barkin argued that inflation dangers carry more weight than employment dangers, justifying last week's rate increase. Barkin, who does not vote on the FOMC this year, likened the Fed's twin goals of maximum employment and stable prices to parenting, describing inflation as the misbehaving child and pointing out it has exceeded the 2% goal for half a decade.[S1]
Barkin outlined two paths: inflation might cool as price shocks diminish, or it might stay entrenched. He said he could envision a quick decline if recent shocks unwind, consumers hit their spending limits, the investment surge loses steam, markets adjust, or hiring weakens. Conversely, he warned inflation might prove stickier if temporary shocks linger, fresh cost pressures emerge, and strengthening demand feeds into prices.[S1]
Barkin observed that the disruptions from the Iran conflict and the AI expansion are not turning out to be brief or isolated. Although they might eventually subside, he believes that will take considerable time, and meanwhile today's high inflation readings could shape expectations for future inflation.[S1]
Supply Shocks and Persistent Inflation
Barkin attributed the central bank's decision to raise rates last week, and its willingness to consider more increases, to persistent inflation recently stoked by rising oil prices and tariffs. He pointed out that new tariffs keep coming, Middle East tensions persist, and AI infrastructure expansion continues to strain supply networks. These factors may eventually fade, but he thinks that will take time, and with inflation over a percentage point above target, that is concerning.[S2]
Barkin stressed that inflation has surpassed the Fed's 2% goal for over five years. Although oil has lifted headline inflation this year, over 60% of the core Personal Consumption Expenditures index is climbing more than 3% annually. He cited Richmond Fed surveys showing prices received grew 3.5% on average since late 2023, nearly twice the pre-pandemic two-year average. The CFO Survey, a joint effort with Duke University and the Atlanta Fed, found firms plan to raise prices 4.1% next year, more than double the 2019 average.[S2]
He said the economy and labor market are still sturdy, and although wealthier households drive much of consumer spending, those with less are managing to keep up their outlays. On the corporate side, Barkin noted businesses are moving past last year's hesitancy because they cannot wait for clarity. Solid profits embolden them, he said, and efficiency gains give them flexibility. The upshot is added inflationary pressure, which is why the Fed had to respond.[S2]
Market Expectations and Economic Outlook
Markets anticipate the Fed will deliver at least one more quarter-point rate increase before year-end. The CME FedWatch tool indicates a 48.3% probability of a single hike to a 4% to 4.25% target range following the October and December meetings, plus a 40.7% chance of a second increase by year-end. Fed officials' economic projections also pointed to one hike before year-end, while Chair Kevin Warsh stuck to his approach of not providing forward guidance at last week's post-meeting press conference.[S1]
Gregory Daco, chief economist at EY-Parthenon, told FOX Business that Barkin's remarks aligned with the FOMC's rate hike because although officials had been patient waiting for core inflation to move toward 2%, that patience appears exhausted, and most now back a slightly more restrictive policy stance. He added that a hiking cycle, if pursued, could further squeeze interest-sensitive sectors already under pressure while barely slowing the AI-driven investment boom, except by raising the odds of a stock market correction.[S1]
Daco further noted that Warsh's explanation lacked clarity on how tighter policy would tackle the inflation overshoot, with officials potentially aiming to reverse some or all of the 75 basis points of cuts made late last year. He said the goal is tighter financial conditions and demand destruction that lowers inflation, but the danger is significant for an economy already dealing with eroding incomes, supply-driven price pressures, and rates that remain persistently high.[S1]
