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A top Federal Reserve official has warned that the US is more vulnerable to inflationary shocks than previously, as businesses brace for increased protectionism and an onslaught of recent economic policies when Donald Trump returns to the White House.
Tom Barkin, president of the Richmond Fed, told the Financial Times that he expected inflation to proceed dropping the world over’s largest economy, despite the fact that progress has plateaued, in accordance with monthly data released by government agencies.
But he cautioned that companies were passing on costs to consumers more readily than previously — although to a much lesser extent than at the peak of the coronavirus pandemic — which was having an impact on prices.
“We’re somewhat more vulnerable to cost shocks on the inflation side, whether or not they be wage-[related] or otherwise, than we might need been five years ago,” said Barkin, who’s a voting member on the rate-setting Federal Open Market Committee this 12 months.
The Richmond Fed president, who once was the chief risk officer at consulting giant McKinsey, also noted that companies were “concerned” in regards to the inflationary effects of the sweeping tariffs and plans to deport illegal immigrants that Trump touted on the campaign trail.
“I can see why the companies think that,” Barkin said, but he noted that other Trump policies related to boosting domestic energy production “could be disinflationary”.
Many economists are also concerned that universal levies on US imports will reignite inflation, however the extent of the impact will rely upon which policies are adopted and the way they’re implemented. In addition they warn that mass deportations could cause price rises while hindering growth, causing a stagflation shock.
Trump and his economic advisers reject these warnings and say that together with deregulation and tax cuts, their policies will make the economy strong while keeping inflation in check.
Barkin argued that the Fed shouldn’t preemptively adjust monetary policy ahead of possible changes in economic policy. “We shouldn’t try to resolve it before it happens,” he said.
Fed officials have already cut rates of interest twice this 12 months and are debating whether to achieve this again at their final meeting in December. Chair Jay Powell last week reiterated that the central bank was not in a “hurry” to cut back rates to a level that constrains growth, given the underlying strength of the economy.
Traders in federal funds futures markets predict the percentages of a quarter-point rate cut to 4.25-4.5 per cent are roughly even.
Barkin said he didn’t need to “prejudge December” but added that forthcoming rate decisions would rely upon data, which currently suggests that the economy is “quite prosperous”.
“When you’ve got inflation staying above our goal, that makes the case to watch out about reducing rates,” he said. “When you’ve got unemployment accelerating, that makes the case to be more forward-leaning.”
Barkin described the Fed’s recent policy moves as a “recalibration” and said questions on the pace of rate of interest cuts can be more relevant once the central bank entered a “normalisation phase” and its policy settings were closer to a “neutral” level.
Speaking on Wednesday, Fed governor Michelle Bowman, who was the lone dissenter to the Fed’s decision to chop rates by a half-point in September, backed moving “cautiously” to bring rates of interest down. Governor Lisa Cook also endorsed a gradual pace of cuts on Wednesday.
