Richmond Federal Reserve President Thomas Barkin said Friday that while he believes the U.S. central bank’s interest rate hikes will be enough to reduce inflation over time, the policy is not perhaps not as strict as is generally thought.
“It’s too early to tell, but there is a way to find out: Proceed deliberately while keeping a close eye on the real economy,” Mr. Barkin said in remarks prepared for delivery at the Global Interdependence Center in Paris. “And that’s what I’m doing.
After aggressively raising U.S. short-term borrowing costs from March 2022 to July 2023, the Fed has left its target policy rate in the 5.25% to 5.5% range for nearly a year. None of the Fed’s policymakers thinks further rate hikes are likely to be needed to reduce inflation, but they disagree on how long to wait before cutting rates.
The economy has been stronger than most forecasts in the face of high borrowing costs, and Mr. Barkin said Friday that while goods inflation had returned to pre-pandemic levels, providers of services, including housing, could still push prices higher.
Mr. Barkin gave no indication of his preferred timetable for rate cuts, but he detailed how most economic forecasters, including those at the Fed, have repeatedly been off target. the plate in the extraordinary circumstances of the closures due to the pandemic and the recovery that followed.
The labor market, for example, far from collapsing when the Fed raised borrowing costs, has remained robust, with the unemployment rate staying at or below 4% for the longest stretch of months since the 1960s.
Consumers continued to spend.
The inversion of the yield curve in the bond market – in which long-term borrowing costs are lower than short-term borrowing costs, which is often a sign of future economic weakness – has proven so far to be a false signal for a recession that has not yet arrived.
And while inflation, as the Fed targets it, has fallen from its peak of 7.1% in mid-2022 to around 2.5% earlier this year, it remains above the Fed’s 2% target and in March and April defied expectations by strengthening again to a pace of 2.7%.
A new reading of the personal consumption expenditures price index is due Friday, and economists expect it to show a slight slowdown in inflation in May.
“I think there are still some lags and all this tightening will eventually slow the economy further,” Barkin said. “At the same time, given the remarkable strength of the economy, I’m open to the idea that the R-Star has moved somewhat higher. The R-Star, also known as the neutral rate, is the level of interest rates that neither restrains nor stimulates a healthy economy.
A rise in the neutral rate would mean that the Fed’s policy rate would also have to be higher to exert the same degree of constraint on the economy. Several Fed policymakers have recently revised upward their own estimates of this rate, which is not observable in real time.
“Agility is key,” Barkin said. “We’re getting new information every day, and we have to adapt accordingly.” (Reporting by Ann Saphir; Writing by Leslie Adler)
