By Howard Schneider
WASHINGTON (Reuters) – The Federal Reserve’s fight to lower inflation “may lead to a downturn” as the central bank’s interest rate increases are “challenged” by still-high consumer savings, still-tight labor markets and ongoing supply problems, Richmond Fed President Thomas Barkin said on Wednesday.
“Our tools to quiet demand and return inflation to our 2% target operate with a lag and have been challenged by the artificial elements of today’s environment,” Barkin said in remarks prepared for delivery to the Top of Virginia Regional Chamber in Winchester, Virginia.
“As a result, bringing supply and demand back into alignment may require still more from us, creating risk to the broader economy,” Barkin said. “Getting to normal may lead to a downturn.”
That is a risk the central bank will have to take, he said, to counter what he said is an even worse outcome if inflation expectations begin to increase.
“If we back off for fear of a downturn, inflation comes back even stronger and requires even more restraint,” he said. The Fed “is not waiting around for things to settle on their own.”
The Fed raised interest rates last week by three quarters of a percentage point, its fourth large increase in what has become the fastest rate hiking cycle since the 1980s.Further increases are expected in coming Fed meetings, though the pace may slow as the central bank feels its way towards a peak level it considers high enough to bring inflation back to the 2% target from a level currently about triple that.
New data on consumer prices will be released Thursday morning.
Barkin’s prepared remarks did not indicate where he thinks that “terminal” level may rest, but made clear the Fed would succeed in its inflation fight.
“We are doing what it takes to get inflation back to our 2% target,” Barkin said. “That’s one place I can assure you we are headed back to normal.”
(Reporting by Howard Schneider; Editing by Andrea Ricci)
