MNI BRIEF: Fed Policy Well-Positioned For Uncertainty - Barkin

The Federal Reserve is well-placed to either weaker growth or higher inflation emanating from tariffs and other factors, though a softer economic backdrop appears to have become a predominant concern as tariff inflation fails to materialize, Richmond Fed President Thomas Barkin said Tuesday.

"We may well see pressure on inflation, and we may also see pressure on unemployment, but the balance between the two is still unclear. As the visibility continues to improve, we are well positioned to adjust our policy stance as needed," Barkin said in prepared remarks. 

Stretched consumer budgets means firms will have a harder time passing higher input costs onto consumers, he said. 

"Amid all the talk of tariffs and higher goods prices to come, we’ve seen people stock up on iPhones and cut back on services, such as air travel and lodging. If we see this kind of demand destruction more broadly, the inflationary impact of tariffs would be less than many anticipate," he said. (See: MNI INTERVIEW: Inflation Could Stifle Fed Cuts-George)

CONSUMER IS KEY

Uncertainty around economic policy in Washington is dissipating to an extent, and whether softer economic growth turns into something more severe depends on how resilient consumers remain, Barkin said. 

"For the economy to falter, in all likelihood, consumer spending would need to pull back more fundamentally," he told The Health Management Academy. "But the fog is lifting. The tax bill has passed. Net immigration is down. Deregulation is underway. Tariff deals are being nailed down. Business, consumer and market sentiment have started to rebound."

He pointed to slower GDP growth in the first half of the year and weakening employment gains but was sanguine about the future.

"We have seen consumer spending soften; real consumer spending has all but stalled the past few months," he said. "But I take comfort in the underlying dynamics. Unemployment is low. Real wages are up. Asset values are high. It’s hard to envision a sustained consumer pullback in such an environment."