Thomas Barkin, president of the Federal Reserve Bank of Richmond, said on the 21st (local time) that amid recent supply shocks, how long corporations and consumers can hold up will be the key variable determining the Federal Reserve's (Fed) monetary policy direction.
In a speech at a public event in Raleigh, North Carolina, the same day, President Barkin said whether the Fed can respond to supply shocks without raising interest rates "ultimately depends on the extent to which corporations, consumers, and inflation expectations can remain steady without being shaken."
Noting that spending has continued even though the consumer sentiment index has fallen to a record low, he said, "Real wage gains are slowing, tax refunds are shrinking, and cheaper substitute options are increasingly hitting their limits," adding, "We have to see whether consumers can keep up their expenditure even in this situation."
President Barkin assessed that although inflation expectations have risen somewhat due to the recent increase in oil prices, they are still stable. However, he said, "Since inflation has exceeded the Fed's 2% target for more than five years, we have to consider the possibility that repeated price shocks will eventually loosen the 'anchor' holding down expected inflation."
He also emphasized the possibility that technological innovation, including artificial intelligence (AI), could have a positive impact on the U.S. economy. He said, "As we saw during the spread of e-commerce, technology can create new demand, lower expense, and generate new sources of supply," adding, "We should not underestimate this potential."
His remarks, from President Barkin, who does not have a vote at this year's Federal Open Market Committee (FOMC), came as sentiment within the Fed has been growing that the possibility of an additional rate hike should not be ruled out.
According to the minutes of the April FOMC released the previous day, many Commissioners judged that if inflation continues to run persistently above the 2% target, additional tightening could become necessary.
Meanwhile, as U.S. President Donald Trump continues remarks pressuring the Fed to cut rates, Kevin Warsh, the next Fed chair nominated by Trump, is scheduled to take office officially on the 22nd.