Fed’s Barkin Says Economy May Be Shifting to Higher Inflation Regime
Richmond Fed president says the central bank may need to tighten monetary policy more often
The Federal Reserve may be facing more persistent inflation pressures that could mean interest rates will be higher than in recent years, Federal Reserve Bank of Richmond President Thomas Barkin said Tuesday.
“There are a few reasons to think we may face more headwinds when it comes to containing inflation going forward,” Mr. Barkin said in a speech text.
“We may need to navigate in the context of more medium-term inflationary pressure than we have experienced during the Great Moderation,” he added, referring to cooling levels of inflation in recent decades.
Mr. Barkin, who is not currently a voting member of the rate setting Federal Open Market Committee, said this potential regime shift could affect monetary policy, though the Fed’s 2% inflation target would remain in place and the central bank would still have the ability to meet that goal.
In the face of more persistent inflation pressures, the Fed’s “efforts to stabilize inflation expectations could require periods where we tighten monetary policy more than has been our recent pattern,” Mr. Barkin said.
“Inflationary pressure puts constantly on the table the potential for a trade-off between employment and inflation, our dual mandate goals,” he added, suggesting the effort to cool inflation could push up unemployment.
Higher longer term inflation could come from different factors, among them a retreat from globalized supply chains, changing demographics reducing the number of available workers, geopolitical events and headwinds related to government spending, Mr. Barkin said.
In the near term, he offered support for the Fed’s effort to bring inflation down with interest rate increases.
“With inflation persisting and broadening, we see clearly that it is time to normalize our monetary policy stance,” Mr. Barkin said. “How far we will need to raise rates in fact won’t be clear until we get closer to our destination, but rest assured we will do what we must to address this recent bout of above-target inflation. And this commitment does not necessarily require a hard landing.”
Mr. Barkin said he was upbeat about the current state of the U.S. economy, citing a strong job market and solid levels of demand.