Fed’s Barkin: Ending Inflation Will Likely Require Falling Demand

Fed’s Barkin: Ending Inflation Will Likely Require Falling Demand
Fed’s Barkin: Ending Inflation Will Likely Require Falling Demand

Richmond Federal Reserve President Thomas Barkin said Monday that ending the fight against inflation will likely require a blow to demand after a year in which price pressures on U.S. unemployment rates eased largely due to improvements on the supply side of the economy, with the unemployment rate barely changing.

“We had a lot of supply-side benefits last year,” Barkin said, noting that an increase in immigration and a jump in productivity allowed economy to grow quickly and create jobs, while allowing inflation to fall quickly.

But since the pace of price increases could stall at a rate above the Fed’s target, “I tend to think we’ll need a little more support from demand to get back to the goal,” Mr. Barkin said in comments to reporters after an event at the Rotary Club of Columbia.

He said he was “optimistic” that the current level of the key rate, held within a range of 5.25% to 5.5% since July, will be sufficient to do the job, and that he does not see overheating of the economy.

But he also said his sentiment about the risks facing the Fed is balanced by the fact that inflation is proving harder to control than expected.

“I’m still pro-inflation,” Mr. Barkin said. “It’s a difficult return… It doesn’t mean you won’t make it. It just means it takes some time […] to convince those responsible for setting prices that they do not really have the possibility” to make aggressive increases.

Mr. Barkin has voted on interest rate policy this year and supported the Fed’s decision at its meeting last week to keep rates unchanged.

His comments on demand suggest that the final phase of controlling inflation may depend on the type of blow to economic growth – and hence the jobs market – that policymakers have hoped to avoid.

In March, the personal consumption expenditures price index, the Fed’s preferred measure of inflation, was increasing at an annual rate of 2.7%, well below peaks reached in 2022, but largely stagnated over the of the first months of the year.

Mr. Barkin said he still saw demand in the economy as strong, but he added that the kind of slowdown needed to end the Fed’s battle against inflation did not need be that deep.

“If the economy cools, it doesn’t have to be as painful as the sharp slowdown we saw between 2007 and 2009, for example,” he said.

Given that the economy appears so resilient, the unemployment rate is 3.9%, and job growth may be starting to approach pre-pandemic levels, Mr. Barkin said that the Fed could afford to wait and be sure that inflation resumed its decline.

The start of the year “has only confirmed the value of the Fed’s resolve,” Barkin said in his speech. “The economy is moving towards a better balance, but no one wants inflation to return. We have said that we want to gain greater confidence that inflation is sustainably approaching our 2 target. And counting Given the strength of the job market, we have time to earn this confidence.”

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