Richmond Fed President: Inflation dissipation takes time, possibility of further rate hikes not ruled out.

Richmond Fed President Barkin warned that the recent series of inflation shocks may take a long time to dissipate, and that persistently elevated price pressures carry the risk of becoming entrenched. After the Fed implemented its first rate hike in more than three years last week, Barkin said the move will help curb inflation, but it remains to be seen whether further monetary tightening is needed and how many more rate increases may be required. Speaking in Baltimore on Tuesday, Barkin said recent supply-side shocks are no longer manifesting as one-off or temporary events, and the resulting price pressures are persisting in the economy. "These factors may eventually fade, but I expect that will take time," Barkin said. In the meantime, the currently elevated level of inflation could further influence the future path of inflation. The Fed voted unanimously last week to raise the target range for the federal funds rate by 25 basis points to 3.75%-4%, its first rate hike in more than three years. In its policy statement, the Fed said inflation remains elevated and that the policy action will help return inflation to its 2% target in a more timely manner. In the latest rate projections released last week, the median forecast of Fed officials showed there may be one more rate hike before the end of this year, while the median federal funds rate projection for the end of 2027 was unchanged from the end of 2026. However, officials remain clearly divided on the rate path for next year. Barkin did not explicitly say whether he supports another rate hike. He said the Fed is committed to bringing inflation sustainably back to its 2% target, and last week's rate increase will help with that. As for whether further rate hikes are needed and how many more may be required, Barkin said: "We'll see." Barkin does not have a vote on monetary policy at the Federal Open Market Committee (FOMC) this year. Despite remaining vigilant on inflation, Barkin's assessment of U.S. economic fundamentals remains relatively optimistic. He said the U.S. economy and labor market remain solid, and feedback from businesses suggests conditions are even strengthening further. The Fed's policy statement last week also noted that U.S. economic activity continues to expand at a solid pace, household spending remains resilient, productivity growth is strong, capital investment is solid, and employment growth has largely kept pace with labor force growth. In his remarks, Barkin laid out two possible scenarios for future inflation. The first scenario is that recent shocks gradually reverse and price pressures cool relatively quickly. He said he does not rule out the possibility that inflation could fall again in a relatively short period. If consumers begin to approach their limits, business investment slows, and the job market weakens, cooling demand could help ease price pressures. The other scenario is that inflation proves more stubborn. Some shocks originally considered temporary may last longer, while new cost pressures could also emerge. If demand strengthens further, businesses may continue to pass costs through to prices, and the current high level of inflation itself could influence future prices. In a Q&A session after his speech, Barkin said he expects some pressures from higher energy prices and tariffs to eventually fade, but restrictive monetary policy also needs to play a role in reducing inflation. He said some inflation factors will indeed pass, and "appropriately restrictive policy" will also play a role. As for how long this process will take and how difficult it will be to bring inflation down by restraining demand, that still needs to be judged from incoming data. He also said the price pressures observed so far are "a little higher" than his comfort level, but looking across the U.S. economy, there are no obvious signs of overheating outside the AI sector. "I don't think the economy is overheating, except in AI, where it is indeed quite hot." The latest economic projections show that Fed officials expect U.S. real GDP growth of 2.3% in 2026, higher than the 2.2% projected in June; the median unemployment rate forecast for 2026 is 4.1%, lower than the previously expected 4.3%. At the same time, PCE inflation for 2026 is projected at 3.7% and core PCE inflation at 3.4%, both revised up by 0.1 percentage point from the June projections. This means the policy environment facing the Fed remains complex: the economy and job market remain resilient, but inflation continues to run above the 2% target, requiring policymakers to continue weighing economic growth against price stability. Boston Fed President Supports Rate Hike, Expects One More This Year On the same day, Boston Fed President Collins also said she supported the Fed's rate hike last week. Collins said that moderately increasing the restrictiveness of the federal funds rate will help ensure inflation sustainably returns to target. With the labor market in a more solid state, monetary policy can focus more on restoring price stability in a timely manner, especially given that inflation has been above target for five and a half consecutive years. Collins also said she is one of the Fed officials expecting another rate hike before the end of this year, while also expecting rates to remain steady in 2027. Judging from the latest "dot plot," Fed officials hold widely differing views on the policy path for 2027. Although the median rate projection shows the policy rate at the end of 2027 roughly unchanged from the end of 2026, some officials expect rates to be at significantly higher levels.