Fed President Willing to Raise Rates if Inflation Doesn’t Fall

Fed’s Barkin willing to raise rates if inflation doesn’t fall soon

Jennifer Schonberger · Senior Reporter
Fri, June 16, 2023 at 10:01 PM GMT+8 · 2 min read

Richmond Federal Reserve President Tom Barkin said Friday that if inflation doesn’t fall closer to the Fed’s target of 2%, he’s comfortable raising interest rates higher.

“I am still looking to be convinced of the plausible story that slowing demand returns inflation relatively quickly to that target,” Barkin said while speaking at the Maryland Government Finance Officer Association. “If coming data doesn’t support that story, I’m comfortable doing more.”

The Fed has moved aggressively against inflation over the last 15 months, hiking rates five percentage points to the current range of 5%-5.25%. Officials decided to pause in June but they are now projecting two more rate hikes this year, bringing the policy rate to as high as 5.5%-5.75%.

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Barkin said he realizes that raising rates higher creates the risk of a more significant slowdown. But he also wants to avoid the experience of the 1970s, when the Fed backed off rate hikes too soon only to see inflation ignite again. That pushed the Fed to jack up rates higher.

Inflation has proven stubbornly persistent. That’s true even excluding housing inflation, a measure the Fed will examine to get a purer look at the issue. Data on rent prices tends to lag.

Barkin says he likes to monitor the monthly median of personal consumption expenditures index to look at the breadth of inflation. But he says based on that measure, inflation hasn’t come in at levels consistent with the Fed’s 2% target in any month since spring of 2021.

“It’s hard to say we’re approaching our target when we haven’t yet hit it even for one month,” said Barkin.

Still, Barkin says, with interest rates adjusted for inflation now positive, the Fed has been slowing down the size and pace of rate hikes.

“That gives us time to assess the data on demand and inflation and determine what more we might need to do,” he says.

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Barkin says he thinks inflation has remained elevated because the pandemic has left economic dislocation. He points to demand that’s still strong thanks to government spending as well as nearly a trillion dollars in excess savings and tens of trillions more in added equity and housing wealth.

At the same time, Barkin says supply is still constrained by pandemic-era retirements and residual supply chain challenges in areas like autos, switchgears, and machinery. Businesses have also been able to raise prices without losing too much on sales, a faster way to fatter profits.

Separately, Fed Governor Chris Waller, speaking early Friday morning in Norway, argued that if the recent strains in the banking sector cause a pullback on lending that might lower the need for “at least some further” interest rate hikes to lower inflation.

“The Fed could tighten policy too much if it ignored such a development,” said Waller.

Source: Yahoo Finance

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