Inflation fears and the resulting bond-market plunge were short-sighted, Richmond Fed president says

• Inflation is a "longer-term phenomena" and not a one-week issue, Richmond Fed President Thomas Barkin said.
• The comments come after investors fervently dumped Treasurys amid boosted expectations for consumer-price growth.
• Businesses in the Richmond area don't seem to be raising prices at an unhealthy rate, Barkin added.

Concerns of rampant consumer-price growth and the resulting sell-off in the Treasury market was natural but missed the bigger picture, Thomas Barkin, president of the Federal Reserve Bank of Richmond, said Monday.

Markets endured a bout of heightened volatility last week as improved growth expectations boosted risk-taking. Investors furiously dumped Treasury bonds and growth stocks for cyclical names in anticipation for new stimulus to drive stronger inflation. The days-long trend sparked questions around whether inflation could soon exceed the Fed's target and, in turn, lead the central bank to raise its benchmark interest rate.

New stimulus and reopening will likely lift price growth, but inflation is a "longer-term phenomena," Barkin said in an interview with Bloomberg TV. A period of strong inflation in the spring will likely be temporary and fade as the economy returns to normal, he said.

"As I'm speaking to businesses in our district, I'm not hearing a sense of overwhelming desire or intent to be escalating prices beyond normal levels," Barkin added.

The sentiment mirrors that shared by Fed Chair Jerome Powell during testimony last week. The central bank chief noted that, while inflation will likely be volatile during reopening, the core dynamics fueling price growth "don't change on a dime." The sudden surge in yields simply shows investors' "confidence" in the economic recovery, he added.

Whether the bond-market slump lasts depends on the driver, according to Barkin. If vaccine rollouts, robust economic data, or stimulus juices growth expectations and prompts a reflation trade, it's a "natural reaction" for yields to climb, he said.

Federal Reserve policymakers are slated to reveal a new set of economic forecasts when they meet later this month. Some expect the inclusion of new stimulus and a steady decline in case counts to usher in a more optimistic outlook, but the Richmond Fed president - who serves as a voting member of the Federal Open Market Committee - said his projections haven't yet changed.

Instead, the "uncertainty range" tied to the path of the coronavirus has narrowed and eliminated some downside risk, he said. The biggest concern and risk to the economic recovery remains the labor market and it's sluggish bounce-back, Barkin added.