Fed should move policy ’with care’ as it responds to inflation, Barkin says

US Federal Reserve President Tom Barkin urged the central bank to move its monetary policy "with care" in its response to inflation, which remains the greatest risk to the economy, he said on Monday. Barkin, who will become a voting member of the policy-setting committee in 2027, acknowledged he does not have a base case for what the Fed should do at the upcoming December meeting. Instead, he stated that the Fed will observe the economy's trajectory before making any decisions.

Barkin pointed out that the past several days since the midterm elections have seen volatility in US stock and bond markets due to the anticipated change in control of the US Congress and a backlash against the rapid deployment of artificial intelligence (AI) data centers in local elections. AI investment is a significant driver of US economic growth but is also viewed by many central bank policymakers as contributing to inflation that remains above the Fed's 2% target.

Barkin emphasized that businesses continue to face rising costs and plan to pass them along to consumers. Despite the heightened inflationary pressures, the risk lies on the inflation side of the Fed's dual mandate of maximum employment and price stability. He suggested that the appropriate direction of monetary policy is relatively clear, given the healthy demand and elevated inflation levels.

However, Barkin cautioned that "it is wise to move policy with care," considering the potential risks to the labor market and the Fed's employment goal. He highlighted that uncertainties surrounding AI technologies could prove particularly consequential in this regard. If AI underdelivers, it could impede business investment, stock prices, and consumer spending, which could lead to higher unemployment.

Conversely, if AI overdelivers and leads to an excessive displacement of workers, it could further exacerbate the labor market challenges.