Richmond Fed's Barkin: Inflation Risks Outweigh Employment Risks

The Federal Reserve raised interest rates last week, and Richmond Fed President Tom Barkin says the fight against inflation is far from over.

Barkin told CFA Society Baltimore on Tuesday that the "risks to inflation outweigh the risks to maximum employment. That's why we raised rates."

The Richmond Fed chief, a non-voting member of the Federal Open Market Committee this year, framed the Fed's dual mandate of maximum employment and price stability as akin to raising children. "Inflation is our troublemaker," he said. Inflation has run above the Fed's 2% target for five years, and that persistence drove the decision to hike.

An open question on further hikes

Barkin declined to commit to a specific path for additional tightening.

"Where do we go from here? We are committed to returning inflation sustainably to our 2% target. Last week's hike will help. Will additional hikes be required and how many? We'll see," Barkin said.

He laid out two competing scenarios. Inflation could ease quickly as price shocks fade. Or it could prove durable.

"I'm open to the possibility that inflation could come back down in short order. Some of these recent shocks could reverse. Consumers could start to reach their limit. The investment boom could slow. Markets could correct. Employment could falter, making the labor market the problem child," Barkin explained.

"On the other hand, inflation could prove more stubborn. Temporary shocks could drag on. New cost pressures could develop. Firming demand conditions could flow through to prices, as could the impact of today's inflation," he said.

Shocks that refuse to fade

Barkin singled out two forces keeping price pressure elevated: the Iran war and the AI buildout. Both "aren't proving to be short-lived or one-off events," he said.

They "may pass in time, I do expect it will take time. In the interim, there is a risk that current elevated levels of inflation could affect future inflation," Barkin added.

That last point matters for policy. If today's inflation feeds expectations and future pricing behavior, the Fed's job becomes harder and the cost of stopping early grows.

What markets expect

Futures markets are already pricing in more tightening. The CME FedWatch tool shows a 48.3% chance of one additional 25 basis point hike to a target range of 4% to 4.25% after the October and December meetings. The probability of a second hike before year's end stands at 40.7%.

The Fed's own economic projections, released alongside the decision, reflected one more hike before the end of the year.

Fed Chair Kevin Warsh, for his part, held to his practice of offering no forward guidance at last week's post-meeting press conference. That leaves speeches like Barkin's, and the quarterly projections, as the primary signals for investors trying to map the rate path into next year.