Fed's Barkin: Still an "open question" if rate hike will be needed to meet inflation target

Though Barkin did not comment on whether he thinks a rate hike is likely, he also noted concerns that current above-target inflation “is more embedded,” with risks of ongoing supply chain problems, and the possibility that AI investment will persist long enough to continue raising prices.

The fact that inflation has been above target since 2021, he said, also risks “an upward shift in the price expectations of firms and consumers,” a development that could push inflation higher and possibly make a rate increase necessary.

After a recent weak jobs report and inflation data that largely met expectations, investors expect the Fed to keep rates steady at the upcoming September policy meeting, but to hike rates in October or December.

It is still not clear the U.S. Federal Reserve will have to raise interest rates to restore inflation to the central bank's 2% target, Richmond Fed president Tom Barkin said on Thursday, noting several reasons to think price pressures will ease on their own.

“The inflation mystery is not whether inflation will come back to our 2% target or not. The Federal Open Market Committee has made clear that we are committed to doing so,” Barkin said in remarks prepared for delivery to the Greenville Chamber of Commerce. “The open question is how it gets there. Will the Fed need to raise rates or is inflation already on a path down to target?”

Barkin noted that he felt “much of today's elevated inflation level has come from shocks, which should pass,” including higher tariffs and oil prices, and surging demand and prices for the supplies and labor needed for the artificial intelligence buildout, a boom that “should ease at some point.”

As those pressures ease, “the current level of interest rates, many think, is still restrictive enough to bring inflation down,” Barkin said.