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A top Federal Reserve official has warned about the threat of resurgent US inflation after Donald Trump takes power, even as he forecast solid growth for the world’s largest economy overall.
Richmond Fed president Tom Barkin said Americans were still spending freely, job losses remained low and US consumers were starting to push back against higher prices.
But while this combination could deliver “more upside than downside in terms of growth” in 2025, Barkin said he also expected “more risk on the inflation side”.
“Wage and product costs could see pressure,” he said in a speech on Friday. “If they do, given recent experience with inflation, price-setters might have more courage to pass costs along.”
Barkin’s comments come just weeks before Trump returns to the US presidency with a vow to raise tariffs and slash taxes and regulation. He has also pledged to crack down on immigration and start mass deportations.
Some economists have warned that the policy agenda could spark a new bout of inflation in the US.
Some Fed officials have begun accounting for Trump’s return in their projections, said the US central bank’s chair Jay Powell last month, by including “highly conditional estimates of economic effects of policies into their forecasts”.
Barkin stressed that uncertainty about what Trump would actually do was clouding the outlook, but assumed there could be “an extended period of back and forth” as the final plans were worked out.
If economic growth unexpectedly faltered, he said, “the damage could be lessened by the potential to walk some of those policies back”.
Speaking later on Friday, Fed governor Adriana Kugler underscored the “wide range of views” in the central bank about Trump’s policies, especially the impact of his tariffs, whether other countries would retaliate and how consumers would respond.
“We’re policymakers and we’re forward looking, so we consider a wide range of possible scenarios,” she said in an interview with CNBC.
Kugler backed the Fed lowering interest rates gradually in 2025 given recent data showing slower progress on pushing down inflation.
“We want to make sure that that is indeed just a bump and not something more permanent,” she said, echoing Barkin in describing the economy as in a “good place”.
The Fed last month lowered interest rates to 4.25-4.5 per cent, while officials significantly scaled back their estimates for rate cuts in 2025 and 2026 and sharply raised their projections for inflation.
Most officials now expect just a half-point worth of cuts this year, down from the full percentage point they pencilled in in September.
Barkin on Friday said the Fed was “well positioned regardless of how the economy develops”.
“Were employment to falter or inflation to re-emerge, we have the tools to respond,” he said.