- It will take time to see what the post-crisis economy will look like, Richmond Fed President Thomas Barkin said on Yahoo Finance.
- He said he needs a few months “to see where reality is” as the Fed walks a tightrope between reining in pandemic aid and cooling down inflation.
- Pulling back support too quickly risks a slower recovery, but moving too late risks permanently higher inflation.
The pandemic recovery has been uncertain from the start, but that murkiness is more intense than ever. Inflation has held at decade highs for longer than expected. A global supply-chain crisis shows few signs of easing. Hiring has picked up, but elevated COVID cases could stifle the rebound.
There are seemingly infinite paths forward, and policymakers are struggling to time their actions, with pressure most intense at the Federal Reserve. The central bank is tasked with keeping inflation in check, and it signaled in November it would soon start reining in its pandemic-era aid. Pulling back support too slowly could solidify inflation at dangerously high levels, but moving too quickly could harm the still-recovering economy.
That’s led some officials to ponder different realities. Some see price growth die down as expected, but others see the US sliding into an inflationary crisis. With possibilities abound, the central bank should be patient, Barkin said.
“It’s helpful to have some time to see where reality is in this economy,” Barkin told Yahoo Finance’s Brian Cheung in an interview published Monday. “If the need to act is there, we’ll do what we need to do.”
The remarks hark to fresh humility in the Fed’s ranks. The central bank has long expected pandemic-era inflation to be “transitory,” meaning it will eventually die down. Yet the Delta wave and supply-chain tangle has left Americans’ massive demand crashing into limited supply. Bottlenecks in the economy were “larger and longer than anticipated” and prompted Fed officials to shift their inflation-rate forecasts higher, Chair Jerome Powell said in September.
Policymakers still expect price growth to die down relatively soon. Powell said earlier in November that he sees supply issues abating and inflation “moving down by the second or third quarter.”
Barkin shared a similar outlook. Supply problems will likely last “well into next year,” but plenty of signs point to softer inflation later in 2022, he said. Surveys show Americans still expecting price growth to cool in the medium- to long-term. Businesses are sending the same signals, and that bodes well for avoiding an inflationary spiral, Barkin said.
“Even today, as they see higher costs and they’re pushing into prices, they’re not talking about this being something that’s going to last year-over-year-over-year,” he added.
Near-term turbulence remains. October inflation data showed price growth accelerating across nearly all categories, signaling stronger inflation was fueled by more than just a couple sectors.
Such broad price growth echoes the inflation crisis of the 1970s. But with so many unusual trends shaping the economy, it would be wrong to conclude that today’s inflation is the new normal, Barkin said.
“We’ve got to get to the other side of this before you really know whether these things are persistent or not,” he added.