If inflation persists, we can react by raising rates further

Richmond Federal Reserve President, Thomas Barkin, has said that he is in agreement with the current trajectory set by the FOMC, who are evaluating whether a 25 bps interest rate hike is required at each meeting. Speaking on Thursday, Barkin commented that there is a lot of money available for spending amongst households. This announcement reaffirms the Fed’s message that it is in no rush to raise interest rates.

While Barkin agrees with the current path for interest rates, he did note the challenges in assessing today’s economy. In particular, he highlights the strength of recent data but also the potential for weakness coming from the banking system. As such, he believes that policy will need to be nimble in order to react if needed.

Regarding inflation, Barkin believes that it is possible that tightening credit conditions, along with the lagged effect of recent rate moves, will bring inflation down relatively quickly. However, he still thinks that it could take time for inflation to return to target. Therefore, policy should allow for this potential lag in order to fully assess the situation.

Barkin’s support for the recent rate increase was influenced by his own experiences in the 1970s. He notes that if inflation is not controlled and is allowed to come back stronger, it requires even more drastic action, which can cause further damage. With inflation high, broad-based and persistent, Barkin did not want to take the risk of backing off too soon. However, he emphasizes that if inflation persists, the Fed can react by raising rates further.

Overall, Barkin’s comments suggest that the Fed is taking a cautious approach to interest rate hikes. While there is money available for households to spend, the central bank is being careful not to push inflation up too quickly. The Fed’s approach is both data-driven and nimble, allowing for policy changes if inflation does become an issue over time.

It is worth noting that this Fed announcement comes as inflation remains a concern for many investors. The Consumer Price Index (CPI) increased 5.4% in June, the largest surge since August 2008, sparking fears of inflation running hot. However, Barkin’s comments suggest that the Fed is still confident that inflation will subside over time. Investors will be closely watching how the Fed balances its mandate of controlling inflation with the need to support the wider economy.

In decades past, inflation was often seen as a sign of a strong economy, but the threat of runaway inflation is not a desirable outcome. It leads to higher costs for goods and services, and ultimately, lower purchasing power. Wage growth has been sluggish in recent years, so even a moderate rise in inflation could erode the real wages of many workers. This is a concern for policymakers, who are looking to avoid a return to the stagflation era of the 1970s, where high inflation was coupled with significant economic slowdown.

Therefore, the current rate of inflation is a delicate balancing act for the Fed. While the US economy shows strength, there is a risk that rising inflation could hamper growth prospects. With ongoing concerns over COVID-19 and the Delta variant, the Fed remains cautious in its approach, allowing policymakers to make nimble policy changes if needed.

As we look ahead, it is clear that monetary policy will continue to be a crucial tool in steering the economy through uncertain times. With both inflation and COVID-19 continuing to pose risks, the Fed’s cautious approach is a sign of pragmatism in a still-uncertain world. While investors may feel some concern over rising inflation, the central bank appears committed to keeping the economy on an even keel over the long term.


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