Richmond Fed President Tom Barkin offered contrasting views on the inflation outlook Thursday, saying its unclear whether the central bank should hike interest rates to guide inflation back to its 2% target.
Last month, the 12-member Federal Open Market Committee maintained the policy rate at 3.50% to 3.75% for the fifth consecutive time. However, three regional Fed presidents preferred a quarter percentage point hike, citing inflation concerns.
"The inflation mystery is not whether inflation will come back to our 2% target or not. The FOMC has made clear that we are committed to doing so," Barkin said in prepared remarks for an event in Greenville, South Carolina. "The open question is how it gets there. Will the Fed need to raise rates further, or is inflation already on a path down to target?"
The debate continues between those arguing that inflation is already headed in the right direction and those who see inflation as "more embedded," Barkin said.
He said current inflation levels are driven by shocks, including tariffs and higher oil prices, "which should pass," though supply chain challenges could persist.
Additionally, artificial intelligence "could be inflationary should its investment wave continue and should it be used for increasing prices," said Barkin, who is an alternate FOMC this year, meaning he gets to vote on policy decisions if a scheduled voter is not available.
Markets have scaled back expectations for a September rate hike following last week's data that showed an unexpected drop in US employment in July, and this week's tame inflation reports.
As of Thursday, markets are pricing in a 64% probability that the Fed will keep its benchmark rate steady next month, compared with 59% on Wednesday, according to the CME FedWatch tool. The odds that the US central bank will hike by 25 basis points in September fell to 36% from 41%.
