FED'S BARKIN SAYS RESILIENT DEMAND ALONGSIDE BROAD-BASED COST INCREASES IS PUTTING UPWARD PRESSURE ON PRICES, THAT HE IS HEARING REPORTS OF BROAD-BASED COST PRESSURES, THAT FIRMS SAY THEY WILL TRY TO PASS ON HIGHER COSTS, AND THAT HE SEES A RISK OF FIRMS PASSING ON HIGHER ENERGY COSTS, WITH THE RISK LYING ON THE INFLATION SIDE OF THE FED’S MANDATE

Richmond Fed President Thomas Barkin reported that resilient consumer and business demand, combined with broad-based cost increases, is exerting upward pressure on prices. He said his contacts describe widespread cost pressures across their operations, with firms signaling they intend to pass those higher input costs on to customers. The transmission mechanism here is inflation repricing: sustained demand alongside cost-push pressure weakens the case for near-term policy easing and pushes out expectations for rate cuts, which feeds through to front-end Treasury yields and the path implied by fed funds futures. Short-duration rate instruments and rate-sensitive sectors are most directly exposed, as are longer-dated bonds if markets begin to price a higher terminal rate or a longer period of restrictive policy. The next catalyst to watch is the upcoming consumer price index release, where core goods and services components will indicate whether firms' stated pass-through intentions are showing up in realized inflation.

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