Richmond Fed President Tom Barkin shared insights on the U.S. economy, emphasizing a positive 2025 outlook fueled by strong consumer spending, despite potential inflation risks. In a recent speech in Maryland, he highlighted the Federal Open Market Committee's (FOMC) decision to decrease the benchmark lending rate by 25 basis points last month, signaling fewer anticipated cuts than previously expected.
The FOMC's Summary of Economic Projections showed an optimistic adjustment in the U.S. economic growth outlook for 2024 and 2025, along with updates on both headline and core personal consumption expenditures inflation forecasts, extending through 2026. Barkin acknowledged the uncertainty surrounding the economic policies of the incoming Trump administration but remained optimistic, stating, "I expect more upside than downside in terms of growth." President-elect Donald Trump has committed to increasing tariffs and significantly reducing taxes and regulations, which could further influence economic dynamics. Describing a "strong but choosier consumer," Barkin noted that consumer spending, which constitutes approximately 70% of Gross Domestic Product (GDP), is currently robust with no indication of a decline.
He remarked, "A stronger workforce, grounded in better value and productivity, has positioned the economy advantageously." This sentiment was supported by a resilient labor market, buoyant equity markets, and high business optimism reflected in recent surveys. Barkin suggested that with business outlooks remaining high and labor supply likely to stabilize, hiring is anticipated to surpass layoffs across sectors. While annual headline Personal Consumption Expenditures (PCE) inflation has met a decrease to 2.4%, it continues to exceed the FOMC’s 2% target.
Barkin expressed concern for inflationary risks tied to rising wage and product costs, emphasizing, "Inflation is not yet back to target, indicating that our mission is ongoing, but we’re less inclined toward stringent measures as we once were to fulfill that mandate." The market's current forecast suggests an 89% chance that the FOMC will maintain interest rates within a 4.25% to 4.50% range in the upcoming meeting, while a lesser probability points to a potential 25-basis point cut, as indicated by the CME FedWatch tool.
Barkin concluded with a forward-looking perspective: "Looking ahead, I anticipate that the narrative will focus more on supply and demand, possibly shaped by geopolitical factors, rather than solely on monetary policy. Should employment weaken or inflation resurge, we possess the necessary tools to address those challenges.".