Tom Barkin, Speech: What’s Driving Inflation? 

“Others argue the Fed was too expansionary for too long — that we were caught off guard after the prior decade of stubbornly low inflation.”

“We believed inflation was temporary, driven by the supply and demand factors discussed earlier. History taught us not to overreact to short-lived supply shocks — it usually doesn’t make sense to constrain the economy to fight a shock that will go away on its own. But inflation didn’t fade as we had expected.”

“To be sure, we have learned something for future supply shocks. With perfect hindsight, it would have made sense to have ended asset purchases and raised rates earlier.”

“And the Fed is moving expeditiously. You’ve likely seen that we have raised rates 300 basis points, started shrinking our balance sheet aggressively and signaled there are more rate increases to come. The transmission of these changes, especially in interest-sensitive sectors, has been rapid. Look at mortgage rates, which in mid-September had more than doubled from a year prior.”

“So, inflation should come down. But I don’t expect its drop to be immediate nor predictable. We’ve been through multiple shocks, as I’ve discussed, and significant shocks simply take time to dampen. On the business side, I still hear firms facing wage pressure, especially for merit pay in the face of this year’s cost-of-living pressures. And while margins remain healthy overall, I’ve heard from many businesses still working to recover costs not yet passed through. On the consumer side, while lower-income consumers are facing stress, higher-income ones seem to be continuing revenge spending.”

“Our rate and balance sheet moves take time to bring inflation down. But the Fed will persist until they do. One of the key lessons from the ‘70s was not to declare victory prematurely. Perhaps we will get help from supply chain and energy market normalization. But we have the tools to bring inflation down, even if those disruptions continue. As we do, we should learn even more about the drivers of this episode and how we can avoid any recurrence.”