The U.S. Federal Reserve should quickly get interest rates up to a level where borrowing costs will no longer be stimulating the economy, and should raise them further if high inflation proves persistent, Richmond Fed President Thomas Barkin said on Tuesday.
“How far we will need to raise rates, in fact, won’t be clear until we get closer to our destination, but rest assured we will do what we must to address this recent bout of above-target inflation,” Barkin said in remarks prepared for delivery to the Money Marketeers in New York. “The best short-term path for us is to move rapidly to the neutral range and then test whether pandemic-era inflation pressures are easing, and how persistent inflation has become. If necessary, we can move further.”
Consumer prices jumped 8.5 percent in March from a year earlier, a government report showed on Tuesday, marking the fastest pace of inflation since late 1981 as Russia’s war against Ukraine sent gasoline and food prices higher and lockdowns in China threatened to worsen inflationary supply chain disruptions.
The Fed, which aims for 2 percent inflation, last month raised interest rates from near zero to begin to deal with what it sees as largely pandemic-induced inflation. Policymakers have signaled they may accelerate the pace of rate hikes and begin to rapidly reduce the Fed’s balance sheet—bloated by its purchases of bonds—to deal a more decisive blow to inflation.
Barkin’s remarks show he backs that approach, and then some.
Many Fed policymakers say they expect the pressures that for decades pushed down on inflation to reassert themselves once pandemic-related constraints on labor and materials fade.
On Tuesday, Barkin said he was not so sure of that narrative, noting that price pressures could remain higher than before if companies choose to remake supply chains so they are more resistant to potential disruptions, if the government needs to spend more to provide benefits to an aging population, and if the labor supply continues to be limited by slowing population growth.
If bouts of high inflation do become more common in the future than they were before the pandemic, Barkin said, “Our efforts to stabilize inflation expectations could require periods where we tighten monetary policy more than has been our recent pattern.”
Doing that could create communication challenges as Fed policymakers explain why stabilizing prices may need to be balanced against costs to employment.
