Fed's Barkin says 'fog' again obscuring economic outlook

WASHINGTON, March 27 (Reuters) - The U.S. war with Iran and the rapid roll-out of artificial intelligence technologies have again clouded the outlook for the Federal Reserve, and make it appropriate to keep interest rates on hold for now, Richmond Fed President Thomas Barkin said on Friday.

Even though uncertainty around tariffs, immigration and other policy shifts had begun to lift, "I can't stand here ... and tell you the fog has lifted. If anything, it's deepened and spread," Barkin said in comments prepared for delivery at an economic forum at East Tennessee State University, with the Iran war delivering an oil price shock and AI providing large levels of investment but also promising to reshape labor markets and productivity trends.

The Fed left interest rates unchanged at its meeting last week and "it felt prudent to hold rates and await more clarity on how we should be leaning to best support the economy going forward. I, for one, am hoping to see some of this fog burn off," Barkin said.

Investors broadly think the spike in oil prices has all but ruled out any Fed rate cuts this year, with an increasing likelihood that the U.S. central bank's next move may be a rate hike, as inflation runs further above its 2% target.

How oil prices feed into inflation depends, analysts say, on how long the conflict lasts, how high prices go, and how rising energy costs influence other prices for things like air travel, the fertilizer used to grow food, and shipping.

Barkin said that even though demand in the U.S. economy has been solid, the oil shock could prompt consumers to shift what they spend money on, and could unsettle consumer sentiment.

Rising gas prices "are highly visible, and there's something fundamentally unsettling about driving by a sign every day that reminds you that prices are going up," Barkin said, noting that recent data indicated that progress towards meeting the 2% inflation target had stalled, "and that was before the oil price spike."

The Fed's preferred measure of inflation is currently running about a percentage point above the target.

(Reporting by Howard Schneider; Editing by Paul Simao)