Fed’s Barkin says timing and pace of rate hikes will depend on inflation

The timing and pace of interest rate hikes will depend on what happens to inflation, and Fed officials may need to act more aggressively if rising prices remain accelerating, he said. Thursday (13) Richmond Fed President Thomas Barkin.

“The closer inflation returns to near-target levels, the easier it will be to normalize rates at a moderate pace,” Barkin said in prepared remarks for a virtual event hosted by the Virginia Bankers Association and the Virginia Chamber of Commerce.

“But if inflation remains high and widespread we would need to adopt normalization more aggressively, as we have successfully done in the past.”

Monetary policymakers are due to debate strategies to remove extraordinary support offered during the pandemic at their next meeting in two weeks’ time, including possible approaches to raising rates and reducing the Fed’s balance sheet of more than $8 trillion in bonds.

Several central bank officials have said in recent days that they would support at least three rate hikes in 2022, starting in March, if the economy remains on its current trajectory.

Labor shortages are part of an enduring phenomenon

Barkin said the labor shortage, which has made it difficult for companies to find needed workers, could persist due to long-standing trends in demographics and challenges related to the pandemic.

The Fed official said he expected the labor market to post more growth last fall as more businesses reopened, but instead, labor force participation is “basically stagnant”, something that monetary policymakers may need to accept.

“I think this is a long-running phenomenon and a lot of it was predicted years ago with the baby boomers retiring, and all the rest of that, and the immigration slowdown,” Barkin said.

He said officials may need to accept that labor force participation is “stagnant” because of demographic issues and because some people have reevaluated their lives and jobs.

Asked about the Fed’s work on a possible central bank digital currency, Barkin said a model in which individuals could hold deposits at the Fed would not be a good fit in the US and could raise privacy concerns.

“You have to think hard about what the use case for digital currencies might be,” Barkin said. Fed Chair Jerome Powell said Tuesday that the institution’s discussion paper on digital currencies will be released in the coming weeks.