The Federal Reserve can bide its time on interest rate cuts and wait for clarity on whether disinflation has stalled as the economy and the job markets remain strong, Richmond Fed President Thomas Barkin said Thursday.
His remarks align with the views of other Fed officials saying they're in rush to lower rates until the U.S. central bank gains greater confidence that inflation is moving sustainably toward the Fed's 2% target. A majority of FOMC members penciled in three rate cuts this year at their March meeting.
"No one wants inflation to reemerge. And given a strong labor market, we have time for the clouds to clear before beginning the process of toggling rates down," Barkin said in remarks prepared for the Home Building Association of Richmond in Richmond, Virginia.
"I am optimistic that keeping rates somewhat restrictive can bring inflation back to our target. While I don’t see the economy overheating, the Fed knows how to respond if it does. And, if the economy slows, the Fed has enough firepower to support it as necessary," he said. "In the interim, I think it is smart for the Fed to take our time." (See MNI POLICY: Fed's Rate Cut Timeline Shaken By Inflation Bumps)
SERVICES INFLATION STILL HIGH
The early 2024 inflation reports have been "a little less encouraging" than last year, with prices rising at a 4.3% annual rate over January and February, compared to where it ended 2023 at 2.6%, Barkin noted. Consumer spending is also softer, raising the question of "whether we are seeing a real shift in the economic outlook, or merely a bump along the way."
Having experienced high inflation in the past two years, businesses may still feel empowered to raise prices, Barkin said. Over half of the PCE basket are increasing at rates greater than 3%, double the pre-pandemic figure, and shelter and services inflation remains higher than historical levels, he said.
"The risk is that as price decreases on goods normalize, continued shelter and services inflation will leave that overall index higher than our target," he said.
Meanwhile, businesses appear better positioned to weather a slowdown, and their hesitance to lay off workers amid labor shortages could mean a downturn would do less damage to the labor market than in the past, Barkin said. "On demand, the historic strength of today’s labor market makes a strong case that we are not in a recession today, but I have to believe all this tightening will eventually slow the economy further." (See: MNI POLICY: Fed Won't Hesitate To Ease If Employment Falters)
