Fed’s Barkin favours gradual rate rises as inflation remains too high

Inflation remains the Federal Reserve’s (Fed) most significant risk, Richmond Federal Reserve President Thomas Barkin said on Thursday. Describing the policy path as straightforward, he added that a gradual approach to raising rates “makes sense.”

Although Barkin said that “inflation is too high,” he reported hearing neither signs of acceleration nor signs of cooling. Turning to the labour market, he said businesses remain wary of taking on staff, “but are not yet firing.”

Barkin outlines inflation risks and the policy outlook:

Economic demand remains robust, although its strength is not being felt in every sector

While firms remain hesitant to recruit, they have not yet begun dismissing staff

Businesses continue to face pressure from costs

Strong earnings continue to encourage companies to invest and retain their workforce

Beginning with tariffs, the cost pressures seen over the past 18 months have been broad-based, leaving firms feeling obliged to pass them on

Inflation is not expected to accelerate, although there are no signs of it declining at present

With the policy direction clear, the question is now one of pace; a gradual approach “Makes sense”

The current policy stance is roughly neutral

Much of the present strength in demand comes from AI

Although interest rates will have some effect on AI, they are probably not the main factor that would restrain it

For the Fed, inflation currently poses the greatest risk

Fiscal policy has supported the economy over the past few years, while the budget deficit is “sizeable,”

There is no view on how fiscal policy will develop after the election

Current productivity gains are thought to owe more to adaptation to the labour shortages that emerged during the pandemic than to AI

The expansion of AI infrastructure has unquestionably added to inflation in the near term

With few employees, data centres lack a natural support base in their host communities

Altering the number of policy-setting meetings is not a major issue

A different schedule of policy meetings offers the benefit of a better flow of data for each session

The Fed’s approach to communication needs to reach a point that suits both the Chairman and the committee

At present, banking-sector credit developments are described as “Reassuring”