Inflation will fall back in line over time, but the process won’t be quick, said Federal Reserve Bank of Richmond President Tom Barkin in a speech Friday at the 2023 Stanford Institute for Economic Policy Research Annual Economic Summit at Stanford University.
“Monetary policy plays an important role here,” Barkin said. “We have raised rates and reduced our balance sheet aggressively in the last year in an effort to bring demand and supply back into balance. Inflation is likely past peak. But I think it will take time to return to target, and as a consequence, believe we still have work to do.”
Additional rate increases have been forecast and the [Summary of Economic Predictions] has made clear it doesn’t anticipate rate cuts this year.
Returning prices to the stability of the last 30 years will likely take a lot more time and effort, and the Summary of Economic Projections shows inflation not returning to 2% until 2025. Barkin said he sees the fight against inflation lasting longer for several reasons “partly because some of the dislocations we saw in the pandemic are enduring. Over a trillion in excess savings are still funding consumption, as are continuing fiscal outlays like the infrastructure bill. New auto inventories and houses for sale remain near historic lows, supporting prices in those sectors. Supply chain challenges remain, for example, in switchgears and cabinets.”
China’s reopening and the war in Ukraine is also putting pressure on commodity prices.
In addition, Barkin noted the labor market remains historically tight and workers, whose real wages fell, are pressing to catch up.
“The Fed’s objective isn’t to hurt the economy, it’s to reduce inflation,” he said. “And if there is one thing we’ve relearned over the last two years, it is that everybody hates inflation. High inflation creates uncertainty. As prices rise unevenly, it becomes unclear when to spend, when to save or where to invest. Inflation is exhausting. It takes effort to shop around for better prices or to handle complaints from unhappy customers. And inflation feels unfair — the wage increase you earned feels arbitrarily taken away at the gas pump.”
But the experience from the inflation fight in the 1970s must not be repeated, Barkin said.
“If you back off on inflation too soon, it comes back stronger, requiring the Fed to do even more, with even more damage.”