Why Fed's Barkin Is Bullish On 2021 US Recovery and Sees Inflation Worries As Manageable

Federal Reserve Bank of Richmond’s President Thomas Barkin on Sunday said the U.S. economy is on course for a strong 2021 as the pandemic recedes and dismissed fears of unwanted inflation despite price pressures.

What Happened: Speaking to Bloomberg on Sunday evening, Barkin said 2021 will be an extremely strong year and it will lead to price pressures but there’s no sign yet that this will deliver unwanted inflation.

“We are going to see an extremely strong year and I think that strong year is going to lead to price pressures,” Barkin said.

According to the central banker, expectations for future price increases would have to really move and begin to get factored into business decisions and wage bargaining for unwanted inflation to remain and there are no signs of that yet. 

Fed officials last week left their benchmark lending rate unchanged and estimated it would remain around zero for the next three years, despite upgrading their U.S. economic outlook and the mounting inflation worries. 

The Fed expects the inflation bump this year to remain short-lived. Officials projected their preferred measure of price pressures slowing to 2% next year following a spike to 2.4% in 2021. Excluding food and energy, inflation is forecast to hit 2.2% this year and fall to 2% in 2022.

Huge fiscal support and widening COVID-19 vaccinations rollout that will help reopen the economy have increased expectations for rate increases and inflation, propelling Treasury yields higher as the central bank and federal government keeps adding stimulus.

“Excess savings and fiscal stimulus should help fund pent-up demand from consumers freed by vaccines and warmer weather,” Barkin later said in his prepared remarks on Sunday evening for a Credit Suisse conference on investment in Asia.

Why It Matters: The U.S. economy is expected to grow faster than previously estimated thanks to President Joe Biden’s recently enacted $1.9 trillion coronavirus federal relief program fueling a jump in household incomes and savings that helps offset the still-deep loss of jobs.

Price Action: The S&P 500 futures traded 0.26% lower, Dow Jones futures were down 0.5%, and Nasdaq 100 futures were up 0.35% at press time on Monday.