Richmond Fed President Tom Barkin On Getting Inflation Under Control

Episode Summary

Executive Summary: Richmond Fed President Tom Barkin argues the U.S. economy remains solid but inflation is proving stubborn, especially with services and shelter still elevated. He sees policy as appropriately restrictive for now, says a renewed hiking cycle would require clear reacceleration in inflation and overheating demand, and defends the Fed’s 2% target and caution against easing too early.

Main Topics: Inflation remains sticky despite cooling trend (Priority: 5/5): Barkin says inflation is moderating over a longer horizon, but the last few months have been stubbornly above target, driven by services and shelter rather than goods disinflation. Demand is strong but not overheating (Priority: 5/5): He notes resilient retail sales and job growth, but says he does not yet see wage or price pressures consistent with an overheating economy. Policy is restrictive, but the degree is uncertain (Priority: 4/5): Barkin believes rates are restrictive enough to fight inflation, though he acknowledges uncertainty around how restrictive policy truly is and how to judge it using financial conditions or r-star. Housing and shelter are central to the inflation debate (Priority: 4/5): He discusses how higher rates affect housing demand quickly but supply with a lag, and says the hope is that demand cools enough for the market to rebalance without derailing future supply. Why the Fed fears easing too soon (Priority: 5/5): Barkin points to the 1970s as a warning that premature rate cuts can let inflation reaccelerate, forcing even harsher tightening later and causing more economic damage. Why the Fed targets 2% inflation (Priority: 4/5): He explains that 2% is a long-established global norm, helps avoid deflation risks, allows room for measurement error, and preserves Fed credibility. R-star remains useful but uncertain (Priority: 3/5): He says the neutral rate is still part of Fed thinking, not as a precise estimate but as a framework for assessing whether policy is restrictive enough, with possible reasons for change including productivity or fiscal policy.

Key Arguments: Inflation is still moderating on a 12-month basis, but recent monthly readings show a plateau above the Fed’s target. Strong demand has not yet translated into overheating, because wage growth and short-term price data do not show escalation. If shelter inflation does not ease, then goods and/or services inflation must run below historical norms to get overall inflation to 2%. Current policy is restrictive, but the actual degree of restrictiveness is hard to know because financial conditions indices and r-star estimates vary widely. The Fed must be cautious about easing too early because inflation expectations can become unanchored, making future disinflation more costly. Housing policy is a lagged tradeoff: higher rates curb demand now, while effects on supply show up much later; the goal is eventual balance. The 2% target is justified by global precedent, prior success, measurement bias, and the need to avoid deflation. R-star remains relevant as a guiding concept, but recent economic resilience could imply a higher neutral rate, potentially due to productivity or fiscal support.

Data Points: Recent inflation pace: 1.9% headline inflation - Barkin cites the seven months before year-end as running at 1.9% headline inflation. Recent inflation pace: Above 3% monthly annualized rate - He says inflation has remained stubbornly above 3% on a monthly annualized basis in recent months. Recent strong job reports: 3 - Barkin says the economy has had three strong job reports this year. Rate target: 2% - He repeatedly refers to the Fed’s inflation target and explains why 2% was chosen. Historical policy concern: The 1970s - He cites the 1970s as the major cautionary example of easing too soon and letting inflation return. Housing market froth: 12 bids per house - He describes the housing market during the rate-hiking cycle as extremely frothy. Housing price premium: $40,000 over list - He gives an example of homes selling far above asking prices during the frothy period. Central bank norm: Pretty much every central bank in the world has 2% - He says many central banks target about 2%, plus or minus. Prior episode length: 30 years - He says the 2% target has worked for about 30 years. Target debate range: Zero to two - He says the historical debate in the 1990s was between zero inflation and 2%, not 3% or higher. Past rate environment: Early 2010s - He notes that estimates of r-star came down significantly during the 2010s.

Pivotal Quotes: "Demand is robust, but not overheating." — Tom Barkin: His core assessment of the current economy and why he thinks policy remains appropriately restrictive. "If it doesn't come down and you want to get to 2%, then either goods or services or both need to run at less than their historic levels of inflation." — Tom Barkin: Explaining what would need to happen if shelter inflation stays elevated. "Inflation doesn't come back to where it was before it comes to higher than it was before." — Tom Barkin: His explanation of why the Fed fears easing too early, based on the 1970s.

Implications: Listeners should expect the Fed to stay cautious and data-dependent. Rate cuts are not assured if inflation remains sticky, especially in services and shelter. Housing may stay under pressure, but the Fed prioritizes restoring price stability and credibility.