Federal Reserve Bank of Richmond President Thomas Barkin said Thursday that the central bank's next steps on interest rates hinge on how households and businesses respond to the sequence of economic shocks now affecting the economy.
Speaking at an economic forum in Raleigh, North Carolina, Barkin said the decision by Fed policymakers to hold the policy rate at their most recent meeting "made sense" because it allowed officials to collect more data on employment and inflation before choosing a direction. He flagged several ongoing developments the Fed is monitoring, including elevated oil prices and the implementation of artificial intelligence technologies.
"It made sense to give ourselves time," Barkin said, and he added that in the coming months the central bank could see further movements that "pressure the employment side of our mandate, the inflation side of our mandate, or conceivably both."
At the April meeting, a growing number of Fed officials indicated that a rate increase might be necessary to respond to inflationary pressures stemming from higher energy costs, an AI-driven investment surge, and resilient consumer spending. Barkin did not outline a personal forecast for the policy rate, instead stressing that the path of monetary policy will be responsive to how economic actors adapt.
He listed specific behaviors the Fed will watch: whether consumers continue to spend at current levels; whether firms use productivity gains tied to AI as justification to cut payrolls; and whether inflation expectations remain anchored after more than five years in which the Fed has missed its 2% goal.
"Looking through supply shocks has worked well for a generation," Barkin said. He also posed the question of whether the cumulative impact of multiple waves of shocks could unsettle inflation expectations, given a range of stresses including higher geopolitical friction, trade fragmentation, extreme weather events, rising government debt, cyber threats, and slower growth in the labor force.
Barkin described the Fed's current policy stance as "well positioned" to handle risks to both employment and inflation. He noted that federal funds futures currently imply that investors view a quarter-point rate increase by the end of 2026 as likely.
On energy, Barkin said gasoline prices may remain elevated for months even after the Strait of Hormuz is reopened. He also addressed the labor implications of AI, saying he does not expect the net effect of AI on jobs to be negative while acknowledging the transition could be difficult for some workers.
Barkin added that before the combination of tariffs and rising oil prices, the Fed was "basically there" in terms of meeting its inflation objective.
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