The Federal Reserve will have to be nimble as it sets interest rates given the uncertainty facing the outlook, Richmond Fed President Tom Barkin said Thursday.
“Most forecasts of our policy path seem to average the risk of higher inflation with the risk of further contagion in banking,” Barkin said in a speech to the Virginia Council of CEOs at the University of Richmond.
“I see the range of potential outcomes as pretty wide,” Barkin added.
In his comments about the sudden collapse of Silicon Valley Bank earlier this month, Barkin said that not every bank failure becomes Lehman Brothers which failed during the 2008 financial crisis.
It is “too early to know” whether banks choose to tighten access to credit.
Barkin said it is possible that tightened credit conditions, along with the lagged effects of previous rate hikes, will bring inflation down relatively quickly.
But he said he saw some factors that point to sticky inflation.
For one thing, two years of high inflation and “ubiquitous” talking about inflation has had an impact on business behavior.
“Pricing is back in play. The impact is considerable as successful increases flow straight to the bottom line,” he said.
Businesses have found that they can raise prices that they hadn’t had the courage to test previously, he said.
“If inflation persists, we can react by raising rates further. It was only a few weeks ago that some were calling for a 50-basis-point increase. And if I am wrong about the pricing dynamics at play, or about credit conditions, then we can respond appropriately,” Barkin said.
The Dow Jones Industrial Average DJIA, -0.02% opened sharply higher but has lost ground as the trading day has progressed. The yield on the 10-year Treasury note TMUBMUSD10Y, 3.551% inched down to 3.56%.
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