Fed's Barkin expects inflation to continue to cool into 2025

Glad to be here.

Thanks. So maybe I'll talk about the data and then also what I'm hearing in the marketplace. On the data side, I've always expected that the last half of this year core inflation would stay flat somewhere in the high twos on a PCE basis. The reason for that is that the reads last year were so good in the second half of the year that the comps were just very difficult. So the numbers are coming in about what we expected. We may get some good news in the first quarter of the year because you'll remember the first quarter was not very good from an inflation standpoint. I am still seeing progress, and where I'm seeing it most is when I talk to people. The way I put it is this: consumers have been frustrated by high prices for a while, but they're finally acting on it. They're buying on promotion, they're trading down, they're going to lower price outlets. You can look at earnings reports of the everyday low price guys and you can see it. Consumers are making choices, and those choices are sending messages to price setters that their pricing power has just gotten limited. So I'm seeing that roll out as I test with businesses what they're planning for the first quarter in terms of price increases. I'm not hearing the kind of inflation we've seen in the past, and that gives me hope that as we get through the first quarter, those numbers will come down.

It's my expectation and it's my hope. Trust but verify, of course.

We have a researcher on my team who wrote a great article on electoral uncertainty, saying you think election uncertainty is about the candidate, but it's actually more about what's the agenda actually going to be as opposed to what people have talked about, and then how much of it gets implemented. I think we're a long way away from knowing what we're going to have in tariffs, how big they're going to be, whether we have retaliation or not. So it's awfully hard to know what the impact is on inflation. Obviously, if you increase the cost of goods coming in the country, that cost will at least in some part get passed on. But a lot depends on what we've got, how long it lasts, what the behaviors are on the backside, and it's just hard to make a call on that.

That doesn't feel to me like a long-term equilibrium. It feels to me like either people are going to end up trusting demand, finding that they're short-staffed and hiring again, or feeling the margin compressed and starting to lay people off. In my conversations, that's why I then push on: are you planning layoffs? And I have to say, you're just not hearing it in any scale. Well, it takes time to plan a layoff, right?

I think we're restrictive enough. The whole notion of what the neutral rate is is one of these unobservable variables that people look for in the forest and can never find. So I think you have to sort of see how restrictive you are by what's happening in the economy. If you think inflation's been coming down, that's a sign we're restrictive. It's just hard to know whether we're somewhat restrictive, a little bit restrictive, very restrictive. You've seen in the SEP the broad range of estimates of r-star of me and my colleagues. We'll just have to figure it out as we go.

Well, I'd like to get inflation sustainably down to 2%. That's the core of being restrictive. I don't think we have to be as restrictive as we were three or four months ago. That's why I voted for the last two rate decreases, because I think we can recalibrate rates to a somewhat less restrictive level and still have the impact we want to have on inflation while having somewhat less impact on demand.