Richmond FED President Thomas Barkin expressed his expectation that higher interest rates would further slow the economy and reduce inflation to the central bank's 2% target.
Barkin, who has the right to vote on monetary policy this year, said in a statement today that the strong labor market offers the FED an opportunity to ensure that inflation falls sustainably before reducing borrowing costs. However, he also warned of the risk that persistent inflation in housing and services could drive high price increases, as has been observed this year.
“I'm optimistic that today's restrictive interest rate level can reduce demand to bring inflation back to our target,” Barkin said in a speech to the Rotary Club of Columbia in South Carolina. “The full impact of higher interest rates has yet to be seen.”
Last week, US Federal Reserve officials kept their benchmark interest rate unchanged since July of the previous year, keeping it at a level not seen in more than two decades. Following the decision, FED Chairman Jerome Powell stated that the latest inflation data did not provide the committee with increased confidence that price increases had slowed to 2%. Powell did not specify when he believes the Fed will cut interest rates.
Richmond FED President Barkin pointed out that sellers are still trying to increase prices and will continue to do so until there is a significant response from customers.
“The risk is that as we receive less aid from the goods sector, continued housing and services inflation will leave the overall index above our target,” Barkin said. “That's what we've seen so far this year.”
The FED's preferred inflation index increased by 2.7% in March compared to the previous year, rising to the 2.5% rate observed in February. Barkin called the inflation figures for the beginning of 2024 “disappointing.”
Despite these challenges, the labor market has remained resilient, but there are also signs of moderation. U.S. employers cut back on hiring in April and the unemployment rate rose unexpectedly. Nonfarm payrolls rose by 175,000 last month, the smallest gain in six months, according to a report released Friday by the Bureau of Labor Statistics.
*This is not investment advice.
