Tom Barkin, Speech: The Need to Be Nimble

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Inflation

“It is possible that tightening credit conditions, along with the lagged effect of our rate moves, will bring inflation down relatively quickly. But I still see three reasons why it could take time for inflation to return to target.”

“First, the pandemic is still with us. Not the public health crisis, thankfully, but the economic dislocation it caused. Over a trillion dollars in excess savings and trillions more in equity and housing wealth are funding consumption. Fiscal outlays are continuing, like the infrastructure bill and state tax cuts. Order backlogs are still being worked down. Inventories remain short in autos and homes, supporting prices in those sectors. The labor market remains historically tight, as I said earlier, in part because employers who have struggled to find workers are reluctant to let them go.”

“Second, firms and workers are intent on recapturing lost ground. I hear from a number of sectors (like health care, utilities and food) that margins have compressed and that they now feel the need to restore them through further price increases. Similarly, workers whose real wages fell are pressing to catch up. Both of these imply further inflationary pressure.”

“And third, and perhaps most fundamentally, two years of high inflation and ubiquitous conversation about inflation have surely had an impact on firm behavior. I think about it like this: For a generation, business leaders learned not to count on pricing to drive profits. Large retailers resisted every price increase and had options to redirect their business to lower-cost suppliers overseas. Consumers found that they had power as well through price-shopping enabled by e-commerce. The Fed had earned real credibility for its ability to deliver stable prices; you could say we played a role in every wage and every price negotiation.”

Fed Funds

“Let me now turn to our most recent meeting. I saw substantial inflationary pressure and a resilient banking system. So, I supported raising rates 25 basis points. I am heavily influenced by the experience of the 70s. If you back off on inflation too soon, inflation comes back stronger, requiring the Fed to do even more, with even more damage. With inflation high, broad-based and persistent, I didn’t want to take that risk.”

“But policy will need to be nimble. Most forecasts of our policy path seem to average the risk of higher inflation with the risk of further contagion in banking. I still see the range of potential outcomes as pretty wide. If inflation persists, we can react by raising rates further. It was only a few weeks ago that some were calling for a 50-basis-point increase. And if I am wrong about the pricing dynamics at play, or about credit conditions, then we can respond appropriately.”