U.S. Inflation Outlook According to Richmond Fed President Thomas Barkin

By Howard Schneider
BALTIMORE (Reuters) – The U.S. central bank’s benchmark policy rate should remain restrictive until there’s more certainty about inflation returning to the 2% target, stated Richmond Federal Reserve President Thomas Barkin on Friday.

“I think there is more upside risk than downside risk” to inflation, Barkin remarked, citing the economy’s robustness and potential renewed wage and price pressures during his speech to the Maryland Bankers Association in Baltimore. “I favor staying restrictive longer, compared to the view of cutting rates to neutral.”

While Barkin is not a voting member of the Fed’s rate-setting committee this year, his opinions are indicative of a growing debate within the central bank on when to adjust interest rates amidst uncertainty as President-elect Donald Trump prepares to assume power later this month.

Barkin foresees a positive economic outlook for the following year, with strong consumer spending and optimism among businesses regarding pro-business tax and regulatory policies from the incoming administration.

Despite heightened consumer price sensitivity likely helping keep inflation on track towards the Fed’s target, Trump’s trade and immigration policies might create wage and price pressures, he noted, emphasizing that continued economic strength poses risks of elevated inflation.

“How economic policy uncertainty resolves will matter. But based on current information, I expect more upside than downside in terms of growth,” he concluded, predicting potential “more risk regarding inflation” if hiring ramps up.

Job Market Sentiment

With businesses maintaining an optimistic outlook and consumer spending persistent, Barkin suggested that the job market is more inclined toward hiring than layoffs.

Inflation Concerns

The Fed lowered its benchmark policy rate by 0.25% at its last meeting and by a total of 1% across its final three meetings of 2024.

A key inflation measure, the Personal Consumption Expenditures Price Index excluding food and energy, was recorded at 2.8% in November, hovering between 2.6%-2.8% since May. Trump’s election has raised further uncertainty about future price trajectories, particularly with potential tariffs on imports and stricter immigration policies possibly impacting costs for businesses.

In December, Fed policymakers anticipated that the benchmark rate would decrease by just 0.5% this year, with expectations that the central bank would maintain its current 4.25%-4.50% policy rate at the meeting scheduled for January 28-29.

Barkin argued that further rate cuts would depend on real confidence that inflation has sustainably dropped to the 2% target and noted that a significant weakening in economic demand would also be crucial for such actions.