A senior Federal Reserve official warned that the U.S. economy is now more vulnerable to inflationary shocks, as businesses brace for potential economic upheaval under Donald Trump's return to the White House.
Tom Barkin, Richmond Fed President and a voting member of this year's Federal Open Market Committee (FOMC), said that while inflation is expected to continue to decline, recent progress has slowed, as monthly government data shows.
He expressed concern about businesses being more likely to pass on costs to consumers than in previous years, although not as aggressively as during the pandemic. This change, Barkin said, is contributing to ongoing price pressures.
"We are now more vulnerable to cost shocks on the inflation side, whether related to wages or otherwise, than we were five years ago," he said.
Barkin, who previously served as Chief Risk Officer at McKinsey, highlighted business concerns about Trump's proposed tariffs and immigration policies, which could have an inflationary impact. “I understand why businesses think that,” he said, adding that Trump’s emphasis on domestic energy production could have the effect of reducing inflation.
US economists share this concern, warning that blanket tariffs on imports could fuel inflation depending on how they are implemented. They also warn that mass deportations could raise prices while slowing economic growth, potentially triggering stagflation. However, Trump and his advisers have rejected this claim, arguing that deregulation and tax cuts would strengthen the economy without driving inflation.
Barkin stressed that the Federal Reserve should not adjust monetary policy prematurely in response to expected government policy changes. “We should not try to fix it before it happens,” he said.
The Fed has cut interest rates twice this year and is considering another cut at its December meeting. Fed Chairman Powell recently said that the central bank is in no rush to push rates to levels that could dampen growth, given the resilience of the economy.
While Barkin declined to speculate on the outcome of the December meeting, he stressed that future decisions would depend on incoming economic data. “If inflation remains above our target, that makes us cautious about cutting rates,” he said. “If unemployment rises, that gives us reason to be more forward-looking.”
Describing the Fed’s latest moves as “recalibration,” Barkin suggested that the question of the pace of rate adjustments will become more relevant as the Fed approaches a “normalization phase,” bringing monetary policy closer to a “neutral” position.
