A senior Fed official warned that the U.S. is more vulnerable to inflation shocks than ever before as businesses prepare for potential trade protectionism and new economic policy shocks that may occur after Trump returns to the White House.

Richmond Fed President Barkin noted that despite monthly data released by government agencies showing stagnation in anti-inflation progress, he expects the inflation rate in the U.S., the world's largest economy, to continue to decline.

He warned that although inflation is currently far below the peaks reached during the COVID-19 pandemic, businesses are passing costs onto consumers more quickly than in the past, impacting inflation.

Barkin said, 'In terms of inflation, whether it is wage-related or other cost shocks, we are more susceptible now than we were five years ago.' He is a voting member of the Federal Open Market Committee responsible for interest rate decisions this year.

The Richmond Fed President, who previously served as Chief Risk Officer at consulting giant McKinsey, also pointed out that businesses are 'worried' about the inflation impact of the broad tariffs and deportation plans that Trump boasts about during his campaign.

Barkin said, 'I can understand why businesses think this way,' but he pointed out that other Trump policies related to increasing domestic energy production 'may have anti-inflation effects.'

Many economists are also concerned that imposing broad tariffs on U.S. imports will reignite inflation, but the extent of the impact will depend on which policies are adopted and how they are implemented. They also warn that large-scale deportations of illegal immigrants could lead to rising prices while hampering economic growth, resulting in stagflationary shocks.

Trump and his economic advisors dismissed these warnings, stating that their policies will combine deregulation and tax cuts to make the U.S. economy stronger while controlling inflation.

Barkin believes the Fed should not preemptively adjust monetary policy before economic policies potentially change. 'We shouldn't try to fix the problem before it happens,' he said.

Fed officials have cut rates twice this year and are discussing whether to cut rates again at the last meeting in December. Fed Chair Powell reiterated last week that given the underlying strength of the economy, the Fed is not in a hurry to reduce rates to levels that would restrict growth.

Traders in the federal funds futures market predict that the Fed will continue to cut rates by 25 basis points in December.

Barkin stated that he does not want to 'prejudge the situation in December,' but added that upcoming rate decisions will depend on data, and current data suggests the economy is 'fairly robust.'

He said, 'If inflation remains above our target, we need to carefully consider rate cuts. If the unemployment rate accelerates upwards, we need to be more proactive in cutting rates.'

Barkin described the Fed's recent policy moves as a 'recalibration' and stated that once the Fed enters a 'normalization phase' and its policy settings are closer to 'neutral' levels, questions about the pace of rate cuts will become more important.

Fed Governor Bowman, who spoke on Wednesday, was the only dissenter in September's decision to cut rates by 50 basis points; she supports 'cautious' rate reductions. Another Fed Governor, Cook, also agreed on gradual rate cuts on Wednesday.

Article forwarded from: Jin Ten Data