By Howard Schneider
RALEIGH, North Carolina, May 21 (Reuters) – How businesses and consumers respond to ongoing economic shocks will determine if the U.S. Federal Reserve can “look through” current high inflation or needs to consider raising interest rates, Richmond Fed President Thomas Barkin said on Thursday.
The decision to hold rates steady at the Fed’s last meeting “made sense” as policymakers gathered more information on jobs and inflation in the midst of a series of economic developments as disparate as high oil prices and the rollout of artificial intelligence technology, Barkin said in comments prepared for delivery to an economic group.
“It made sense to give ourselves time,” Barkin said, adding he expected that in coming months the Fed could see further developments that “pressure the employment side of our mandate, the inflation side of our mandate, or conceivably both. If we do, the Fed is well positioned to respond as appropriate.”
A growing number of Fed policymakers at the April meeting felt a rate hike might be needed to quell inflation that has been rising in the face of high energy costs, an investment boom around AI, and household consumption that has remained unexpectedly resilient.
The Fed next meets on June 16-17, the first meeting to be led by incoming Fed Chair Kevin Warsh, and policymakers are expected to keep the policy rate in the 3.5% to 3.75% range where it has been since December.
Barkin did not directly weigh in on his expectations for interest rates or whether a hike may be needed.
But he said the path of policy will hinge on whether consumers remain as resilient as they have been in spending, whether businesses start using rising productivity as a reason to lay off workers, and whether inflation expectations can remain anchored after more than 5 years in which the Fed has missed its target.
“Looking through supply shocks has worked well for a generation,” Barkin said. “Looking forward, it’s easy to imagine more challenging conditions: heightened geopolitical tensions, trade fragmentation, more frequent severe weather events, rising government debt, cyber risk, slowing workforce growth and more..It’s worth asking whether the cumulative impact of so many waves risks loosening the anchor.”
Barkin said that between high inflation and the possible coming risks to the job market he was “not leaning toward overly focusing on one side or the other” as posing the greater problem right now, and downplayed the significance of debates about whether the Fed’s policy statement should open the door to the possible need for a rate increase.
Minutes of the last Fed meeting showed increasing concern about the job market and arguably less worry about unemployment, with a majority acknowledging rate hikes may be needed and “many” ready to shift the language of the policy statement to make that clear.
Chicago Federal Reserve President Austan Goolsbee on Thursday said in an interview on WBEZ Chicago radio that he feels “we have a pretty significant inflation problem developing, but the job market has been mostly stable…I’m the most attuned on this inflation side, because we were making progress, then we stopped making progress.”
(Reporting by Howard Schneider; Editing by Chizu Nomiyama)
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