(Bloomberg) -- Federal Reserve Bank of Richmond President Tom Barkin said the central bank must remain determined in its inflation fight and flagged the risk of longer-term inflationary headwinds.
“It makes sense to stay modestly restrictive until we are more confident inflation is returning to our 2% target,” Barkin said Tuesday in a speech in Richmond, Virginia. “I recognize the fight against inflation has been long, but it is critical that we remain steadfast.”
Barkin underscored the challenge uncertainty presents for the Fed, including around policy changes in Washington. Given the difficulty of making significant changes to monetary policy against such a backdrop, the Richmond Fed chief said he prefers “to wait and see how this uncertainty plays out and how the economy responds.”
After delivering three consecutive interest-rate cuts in late 2024, Fed officials have broadly signaled caution about the timing of additional reductions. They have pointed to sticky inflation figures and a solid underlying economy, along with uncertainty about the potential effects of President Donald Trump’s economic policies, as cause for patience in adjusting interest rates further.
Still, several policymakers have expressed optimism inflation can continue to ease toward the Fed’s 2% objective. Economists surveyed by Bloomberg expect figures due Friday to show annual inflation cooled in January, according to the Fed’s preferred measure, but remained above 2%.
“We aren’t yet back to our target, but we have come a long way,” Barkin said of inflation.
But Barkin also cited various factors that could put upward pressure on prices in the longer term, such as a historically large US federal deficit, demographic trends in the labor market and potential changes to migration flows.
“All these trends suggest we could see our tailwinds replaced by inflationary headwinds,” Barkin said.
“All this uncertainty argues for caution as we look to wrap up the inflation fight,” he added. “If headwinds persist, we may well need to use policy to lean against that wind.”
Labor Market
He described the labor market as solid. The Fed began cutting its policy rate in 2024 partly because of concerns the labor market might begin to deteriorate, but recent data have reassured officials conditions are sound.
Meanwhile, since taking office last month, Trump has embarked on an ambitious economic agenda. His administration launched an immigration crackdown, began downsizing the size of the federal workforce and imposed additional tariffs on China while threatening to do the same for other US trading partners.
These moves have the potential to affect the outlook for inflation, the labor market and overall economic growth — although analyst estimates vary on the degree.
Some Fed officials, including Chair Jerome Powell, have said there aren’t yet enough details about Trump’s policies to estimate how they might affect the central bank’s interest-rate decisions. Barkin noted that while history offers some guidance on how tariffs may impact the economy, much is still unclear.
“The policies this time won’t be exactly the same, and we don’t know whether our recent experience with inflation will exacerbate or mitigate the impact this time,” Barkin said.