Richmond Federal Reserve President Tom Barkin has laid out the rationale for keeping interest rates unchanged, pointing to evidence that inflation is currently declining. However, he simultaneously acknowledged the risk that some price pressures could become entrenched and persist, potentially forcing the central bank to tighten monetary policy further.

Speaking in Greenville, South Carolina, on Thursday, Barkin stated, "Inflation is currently elevated, but to a large extent, it's driven by shocks that should fade over time." He cited factors such as tariffs and oil price shocks resulting from the conflict in Iran as examples of these temporary pressures.

Barkin added that if supply chain disruptions endure and the investment boom linked to artificial intelligence continues, it could create more lasting price pressures. "Inflation has been too high for too long, which could cause inflation expectations among businesses and consumers to rise," he said. "If that happens, bringing inflation fully back to the target level would require policy to provide further assistance."

Barkin, who does not have a vote on the Federal Open Market Committee this year, did not reveal which of these two scenarios he would prefer when policymakers meet in September. He emphasized that the US unemployment rate has remained below 4.5% for 58 consecutive months, setting a record for the longest stretch on record.

While acknowledging that lower-income households are having to tighten their budgets, Barkin noted that consumers overall are still finding ways to maintain spending. Furthermore, he pointed out that investment activity is not limited to AI data centers, with other sectors also experiencing growth.