- Fed Will ‘Do What It Takes’
By Steven K. Beckner
(MaceNews) – Richmond Federal Reserve Bank President Thomas Barkin said Wednesday the Fed is determined to beat down inflation – even it means recession.
Barkin gave no indications of how much more monetary tightening he thinks will be needed to bring inflation down to the Fed’s 2% target, but said, “We will do what it takes.”
In the process, he acknowledged, a recession is possible.
Barkin is just the latest Fed official to reaffirm the Fed’s determination to reduce inflation in wake of the policymaking Federal Open Market Committee’s fourth increase in the federal funds rate – a second straight 75 basis point rate hike that took that policy instrument to a 2.25% to 2.50% target range.
Other Fed officials, including St. Louis Fed President James Bullard, San Francisco Fed President Mary Daly, Chicago Fed President Charles Evans and Cleveland Fed President Loretta Mester have also stressed the Fed’s commitment to inflation reduction in recent days.
Barkin, speaking to the Shenandoah Valley Partnership in Rockingham County, Virginia,admitted that the Fed only belatedly came to a realization that inflation was a serious problem, but with inflation now exceeding 9%, is now determined to conquer it.
“At first, these inflationary pressures seemed temporary, driven by pandemic reopening or supply chain challenges like semiconductor chips,” he said. “But inflation has persisted, risen and become ever broader based. So the Fed’s responsibility is to act to reduce inflation and stabilize expectations, and we are.”
Noting that the FOMC has now raised the funds rate 225 basis points and has started shrinking the Fed’s bloated balance sheet, Barkin said he and his fellow policyimakers have “signaled there are more rate increases to come.”
“We are committed to returning inflation to our 2% target and have made clear we will do what it takes,” he added.
But results won’t be immediate, as the Fed works to bring supply and demand into balance, according to Barkin.
“The Fed’s tools work over time,” he said. “So I expect inflation to come down but not immediately, not suddenly and not predictably.”
“Some sectors are in oversupply; others still have cost increases they are passing on,” he continued. “After a decade of stability has been replaced by extreme volatility,”
Barkin said he would “expect inflation to bounce around on its way back to our target. These significant shock waves will take time to dampen.”
He predicted inflation will come down “in three lanes.”
“First, demand should flatten, reducing pricing pressure,” he said. “Fiscal stimulus has waned, and excess savings are being spent down….Higher rates should slow the economy by increasing borrowing costs and disincentivizing spending and investment.”
“We are starting to see some precautionary softening in business investment and slowing in interest-sensitive sectors like housing,” he went on. “Real consumer spending grew only 0.1% in June.”
In a second “lane,” Barkin said “pandemic supply chain challenges should heal as pandemic pressures ease and companies adjust.”
His third lane is commodity prices. Here, he said, “the Fed has little influence here. But we are seeing over the last two months, the dollar strengthening and gasoline and even the broader range of commodities dropping from peak pricing levels. Hopefully commodities will continue to normalize and not be victim to further events (like a natural gas shut-off in Europe).”
Barkin acknowledged that the Fed’s efforts to reduce inflation are generating “worries about a recession,” especially after two consecutive quarters with negative GDP growth. But he said “recession fears are a little inconsistent with an economy adding almost 400,000 jobs a month and with unemployment near its historic low at 3.6%.”
Even so, Barkin conceded that consumer and business sentiment are “quite negative,” that Fed policy has made markets “skittish” and that the yield curve has inverted. So a recession is possible,” he said.
“There is a path to getting inflation under control,” he said. “But a recession could happen in the process.”
“If one does, we need to keep it in perspective: No one canceled the business cycle. We are out of balance today because stimulus-supported excess demand overwhelmed supply constrained by the pandemic and global commodity shocks.”
Part of the Fed’s anti-inflationary task is controlling inflation expectations, Barkin emphaized. “Stabilizing expectations by getting inflation to target creates the certainty that enables growth and supports maximum employment.”
And he vowed, “the Fed is committed to getting inflation under control.”
“We may or may not get help from global events and supply chains, but we have the tools, and we have the credibility with households, businesses and markets required to deliver that outcome over time and we will,” he added.
Contact this reporter: steve@macenews.com
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