Federal Reserve's Barkin: Inflationary pressures will take time to subside; whether to raise interest rates further "depends on the situation."

Richmond Federal Reserve President Tom Barkin warned on Tuesday that the inflation shock will not subside overnight, and that the current high inflation level risks being transmitted to future expectations and becoming entrenched.

In a speech in Baltimore, Barkin stated that the Federal Reserve's rate hike last week helped suppress inflation, but he did not explicitly state whether further policy tightening was needed. He emphasized that the supply-side shock is no longer a one-off or temporary event, and price pressures within the economy are persistent.

"These pressures may eventually subside, but I expect it will take some time, during which time the current high inflation levels could influence future inflation trends."

Barkin does not have a vote on the Federal Open Market Committee (FOMC) this year. Regarding the future policy path, he stated:

"Our commitment is to sustainably push inflation back to our 2% target. Last week's rate hike will help. As for whether further rate hikes are needed, and by how much, we will decide based on the situation."

Two scenarios coexist, and uncertainty remains about the future.

Barkin outlined two possible paths for inflation.

In an optimistic scenario, the recent shocks gradually subside and price pressures cool rapidly—consumer spending hitting its limit, investment slowing, and the labor market showing signs of easing could all accelerate this process.

In a pessimistic scenario, inflation could be more stubborn. Barkin points out that temporary shocks may be prolonged, new cost pressures may emerge, and continued strong demand, along with the secondary transmission effect of current inflation, could further push up prices.

The core judgment in Barkin's speech was that supply shocks are no longer one-off events. He believes this is the underlying reason why inflationary pressures continue to spread throughout the economy.

The economic fundamentals remain resilient.

Despite the uncertainty surrounding the inflation outlook, Barkin remains relatively optimistic about the overall economic situation. "The economy and the labor market remain on solid ground," he said. "The feedback we're hearing from businesses is that, if anything, the economic situation is strengthening further."

Federal Reserve officials unanimously voted to raise interest rates last week, the first time in more than three years, raising the target range for the federal funds rate to 3.75% to 4%. Officials' concerns about inflation continue to rise—inflation has failed to fall back to the 2% policy target for five and a half years, with some officials explicitly warning of persistent price pressures.

In the latest dot plot of interest rates released last week, the median forecast from officials indicates one more rate hike this year. The median forecast for 2027 points to no further increases in the benchmark interest rate, but eight officials believe that the rate will be 50 basis points higher than the current level by then, indicating that internal disagreements among officials persist.

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