Higher Rates Needed for Today's Economy: Fed's Barkin

Barkin noted that the longer-run growth rate of the economy is challenged by slow population growth and a decline in the labor force participation rate as people retire. He said the Richmond Fed forecasts a 2 percentage point drop in participation over the next five years, and productivity is rising around a 1.25 percent pace. In a slow-growth environment, "interest rates are likely to be lower," he said.

"The gradual path we are on seems like a sensible one to me and I am supportive of it, which I describe as raising rates at a measured pace and looking around and seeing what you see in the data," Barkin said.

Some Fed policy makers have argued for raising rates until they reach the so-called neutral level, where policy is neither supporting nor hindering growth. Officials put neutral at 2.9 percent, according to their median projection in June. But there is a range of views around that estimate and Barkin said it was hard to pin it down to a precise number.

Hurt Growth

Raising rates too far could hurt growth, though "given the strength of the underlying economy and the recent additional fiscal stimulus, the risk of normalization is reduced," he said.

The Richmond Fed district includes several large export-oriented industries, particularly in South Carolina which is home to the largest BMW plant in the world. Barkin said the impact of tariffs on the broader U.S. economy isn't very large yet, though "tariff concerns are making people more nervous." The main channel where it could have an impact is business spending, he said.

"The contacts I talk to are very interested where the tariff conversation" is going to end up, Barkin said. "It is very expensive to reconfigure a supply chain. People are hesitant until they figure out where things are going to land to make those big investments."