A top Federal Reserve policymaker said Monday that he anticipates the supply chain issues that have been pushing prices higher to last "well into next year."
Thomas Barkin, the head of the Federal Reserve Bank of Richmond, told Yahoo Finance that combined with excess savings as a result of government stimulus, inflation could be poised to remain high in the coming months.
“I personally think it’s very helpful for us to have a few more months to evaluate: is inflation going to come back to more normal levels?” Barkin said.
Barkin’s comments come as government statistics show prices rising 6.2% on a year-over-year basis, the fastest pace seen in the Consumer Price Index since 1990.
Faced with higher costs to produce and ship goods, a lot of companies have raised prices on consumers to cover their margins. High demand, thanks in part to the roughly $2.5 trillion in excess savings parked in Americans’ pockets, has allowed consumers to take those price hikes to the chin.
Barkin said small businesses are experiencing a weird operating environment where they have rising costs and can’t find labor, but are still managing record profits. Still, a decline in consumer expectations as a result of rising inflation remains a serious risk.
“They’re just nervous, concerned about some of these things [like] inflationary pressures,” Barkin said.
Those concerns have the power to weigh on inflation expectations. The idea: that fears over rising inflation will spur more consumption to get ahead of future price hikes, thus fulfilling the prophecy itself of rising prices due to a spike in demand.
For now, Fed officials say inflation expectations don’t appear to be unmooring themselves from the Fed’s longer-run inflation target of 2% (as measured in Personal Consumption Expenditures).
“I’ve taken some comfort when I talk to businesses, because even today, as they see higher costs and they’re pushing into prices, they’re not talking about this being something that’s going to last year over year over year, which is really what persistent inflation is,” Barkin said.
Wait and see
Since the depths of the pandemic, the Fed has supported the economy through a cocktail of easy money policies: near-zero, short-term borrowing costs and aggressive asset purchases to reassure markets of its support.
Earlier in the month, the Fed said it would take the first steps in paring back its accommodation of the economy by slowing those purchases. Under the so-called quantitative easing program, the Fed has been snatching up about $120 billion a month in U.S. Treasuries and agency mortgage-backed securities. Starting this month, the Fed will start to “taper” those purchases by about $15 billion per month.
Doing so would allow the Fed to bring the program to a full stop by the middle of next year, after which the Fed could deal with rising inflationary pressures through the more potent tool of interest rate hikes.
Barkin, who is a voting member of the policy-setting Federal Open Market Committee, said “we’re not going to hesitate” to accelerate that process to get ahead of runaway inflation if needed. But Barkin said he would like to see more healing in the labor market, where over 4 million people still remain out of the labor force compared to pre-pandemic levels.
“I personally think it’s very helpful for us to have a few more months to evaluate, is inflation going to come back to more normal levels? Is the labor market going to open up as people spend through some of this savings?”
Barkin added that the holidays may be a critical time to make these assessments, as Christmas spending supports more hiring.
The Fed’s next policy-setting meeting is scheduled just before the holidays, on Dec. 14 and 15.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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