Richmond Fed chief says inflation risk could mean more rate hikes ahead

Federal Reserve Bank of Richmond President Tom Barkin said in a speech before CFA Society Baltimore on Tuesday that the risks of persistent inflation outweighed the risks to maximum employment, which was why the Fed raised interest rates last week. Barkin, a non-voting member of the Federal Open Market Committee this year, noted inflation has stayed above the Fed's 2% target for five years.

Barkin said the Fed is committed to bringing inflation back to that 2% target and that last week's hike will help, but he did not say how many additional hikes might be needed. He said inflation could ease quickly if recent price shocks reverse, consumers pull back spending, or the investment boom slows, but it could also prove more stubborn if new cost pressures build or demand conditions push prices higher.

He pointed to the Iran war and the AI investment buildout as shocks that are not proving to be short-lived, saying that while they may pass, it will take time, and elevated inflation now carries a risk of feeding into future inflation.

Markets are pricing in at least one more quarter-point rate hike by year's end, with the CME FedWatch tool showing roughly even odds of one or two additional increases after the Fed's October and December meetings. EY-Parthenon chief economist Gregory Daco said Fed policymakers have run out of patience waiting for inflation to converge to target and are now leaning toward a more restrictive policy stance, which he said risks tightening financial conditions for an economy already dealing with income erosion and elevated rates.

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