Bringing inflation under control doesn’t automatically mean the national economy will enter recession, much less a severe one, the leader of the Federal Reserve Bank of Richmond said Wednesday.
Tom Barkin, president and CEO of the Richmond Fed, sought to reassure a business group in the Shenandoah Valley that the bank is committed to reducing inflation while maintaining economic growth as the United States moves beyond what he called “the war on COVID.”
The Federal Reserve Board, of which Barkin is a member, has raised interest rates by 2.25% over its last four meetings, including 0.75% last week, with more hikes likely to come.
“We are committed to returning inflation to our 2 percent target and have made clear we will do what it takes,” he told the Shenandoah Valley Partnership, meeting at Blue Ridge Community College in Weyers Cave.
However, Barkin urged patience as the inflation declines after reaching a 40-year high on the Consumer Price Index last month at 9.1% and 6.8% on the Personal Consumption Expenditures price index.
“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.”
“After a decade of stability has been replaced by extreme volatility, I’d expect inflation to bounce around on its way back to our target,” he added. “These significant shock waves will take time to dampen.”
Barkin acknowledged fears that the U.S. economy already is in recession after two consecutive quarters of negative growth in the gross domestic product, 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 percent.”
He cautioned against “talking ourselves into a recession,” while recognizing warning signs of a slowing economy.
If a recession does come, “we need to keep it in perspective,” Barkin said. “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.”
He cited progress in reducing prices by increasing the cost of borrowing and lowering consumer spending, which he said grew just 0.1% in June.
Barkin expects supply chain disruptions to “heal as pandemic pressures ease and companies adjust.”
“We’ve seen some early signals of this healing, with freight costs decelerating, large retailers announcing that they are now more than fully stocked and employers having more hiring success, but it will still take time for these pressures to fully abate,” he said.
Even the cost of commodities, such as oil and wheat, has begun to subside, he said, even though “the Fed has little influence here” because of global price shocks caused by the Russian invasion of Ukraine, now in its sixth month, and further lock downs in China as COVID-19 has developed new variants of the virus.
Barkin likened the rise of inflation after nearly 30 months of pandemic to similar price increases after the end of both world wars, followed by economic booms.
“Stabilizing expectations by getting inflation to [the Fed’s 2%] target creates the certainty that enables growth and supports maximum employment,” he said.
“We may or may not get help from global events and supply chains, but we have the tools,” he said, “and we have the credibility with households, businesses and markets required to deliver that outcome over time, and we will.”
