Fed's Barkin: Extensive uncertainty could hit demand, policy in good place awaiting more clarity

By Howard Schneider

LEXINGTON, Virginia (Reuters) - The Federal Reserve's current "moderately restrictive" monetary policy is right for an environment with an abnormal amount of uncertainty and fast changes taking place in U.S. government policy, Richmond Fed President Tom Barkin said on Thursday.

Barkin, in prepared remarks for an economics lecture at Washington and Lee University, did not directly address the potential fallout from the 25% auto tariffs announced on Wednesday by President Donald Trump.

But like other Fed officials of late, Barkin was at least entertaining the idea that the suite of tariffs being rolled out by Trump could lead to higher-than-expected inflation, though the impact of that could also be offset by tax and regulatory policies still to come.

"In the context of recent high inflation, one could imagine more of an impact on prices," Barkin said. "But no one knows where the tariff rates will finally settle or how affected countries, businesses and consumers will respond."

Regardless, the new administration's policies were now "center stage" and moving fast, Barkin said, leaving businesses and consumers unsure of what might happen - for better or worse. The direction of expected changes on things like tariffs, immigration and taxes may be known, but the net effect remains up in the air, likely making businesses and consumers cautious about spending and investment plans.

"Sentiment matters. For consumers and businesses to spend and invest, they need to have a certain level of confidence," Barkin said. "For credit and equity markets to finance those investments, they need stability. And, for now, an uncertainty-driven drop in sentiment looks like it could quiet demand."

"With all this change, a dense fog has fallen," he said. "It’s not an everyday 'forecasting is hard' type of fog. It’s a 'zero visibility, pull over and turn on your hazards' type of fog."

The Fed held interest rates steady at its meeting last week, and policymakers both marked down their estimates of growth and marked up their estimates of inflation for the year.

"We are waiting for the fog to clear," Barkin said. "With the labor market still solid and inflation still above target, our moderately restrictive stance is a good place to be. If conditions start to shift, we are well positioned to adjust."

(Reporting by Howard Schneider; Editing by Dan Burns)