Fed’s Barkin: I’m encouraged by where inflation is headed

• I see positives on both sides of the Fed’s mandate
• You can’t ignore last month’s jobs report at +12K even if there are skews
• To me, normalizing is a slower and more-careful path to bring rates to neutral
• Even the best models of neutral have a 200 bps span
• We have people as low as 2.5% for neutral and as high as 3.75% at Federal Reserve
• We want to get to ‘somewhat restrictive’ policy but there are different points of view on what there is
• Surveys of business leaders show ‘significantly more optimism’ since election
• It’s a judgement call for when you are done recalibrating and start moving more slowly to normalize
• Whether tariffs cause inflation depends on Fed response
• The bare to raising prices is lower than it was before the pandemic

I think this is an interesting line that speaks to Fed thinking and the nature of inflation. Once you’ve raised prices — and especially if you’ve raised the repeatedly — the whole system of commerce becomes more accustomed to price increases, including suppliers and consumers. That removes some of the friction around raising prices and that makes price hikes more likely. So the argument is that the Fed should run tighter than usual for a period.

This article was written by Adam Button at www.forexlive.com.