Economic Outlook by Tom Barkin

By Howard Schneider

WASHINGTON (Reuters) – Aggressive shopping by consumers may mute the impact of tariffs on inflation but could lead to a cycle of falling demand and rising unemployment, said Richmond Fed president Tom Barkin on Tuesday. He expressed hope that a sharp rise in the jobless rate will be avoided because household spending has held up well so far.

Barkin, in prepared remarks to a health group in Chicago, mentioned that the earlier “fog” clouding the economic outlook is lifting with the passage of a major tax bill, improved visibility on changes in immigration, and finalization of trade deals by the Trump administration.

He stated that the net outcome now depends on consumer responses to emerging price pressures, suggesting that the shift to bargain hunting and front-running tariffs may actually help mute inflation.

> “Amid all the talk of tariffs and higher goods prices to come, we’ve seen people stock up on iPhones and cut back on services, such as air travel and lodging. If we see this kind of demand destruction more broadly, the inflationary impact of tariffs would be less than many anticipate,” Barkin said.

Recent data showed that July consumer price inflation was largely in line with expectations, with “core” inflation rising to 3.1%.

Barkin warned that if consumers pull back too sharply, businesses may see drops in volume and squeezed margins, leading them to cut costs and potentially impacting employment. However, he believes this outcome can be avoided as businesses have been hesitant to lay off staff amidst slow growth in labor supply due to immigration policies and retirements among older workers.

> “Job gains have slowed recently, which is certainly worth watching. But I’m hopeful that even as businesses face cost and price pressures, they’ll largely avoid the type of large layoffs that would spike unemployment,” he said.

Though Barkin is not a voter on interest rate policy this year, he believes the current benchmark rate of 4.25% to 4.5% is “well positioned” to respond to either rising inflation or unemployment, both of which are still possible.

> “We may well see pressure on inflation, and we may also see pressure on unemployment, but the balance between the two is still unclear,” he noted. “As the visibility continues to improve, we are well positioned to adjust our policy stance as needed.”