Fed’s Barkin: Balance between inflation and unemployment is unclear
Richmond Fed President Tom Barkin said on Tuesday that strong consumer spending might be cushioning the impact of tariffs on inflation, but he warned it could eventually give way to weaker demand and higher unemployment.
Key Quotes
- May well see pressure on inflation and unemployment; the balance between the two is unclear.
- Fed policy is well positioned to adjust as visibility about the economy lifts.
- For the economy to falter, consumer spending would have to pull back more significantly.
- Though spending has softened, it is hard to envision a serious pullback given low unemployment and ongoing wage gains.
- Shifts in consumer spending may be helping dampen the impact of tariffs on inflation.
- Employment could take a hit if consumers do pull back, but hopefully large layoffs will be avoided.
- Any increase in the unemployment rate may be less than expected due to decreased immigration and lower labour supply growth.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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