Richmond Fed President Thomas Barkin pointed out that after experiencing the highest interest rates in 20 years and the alleviation of supply chain issues, the slowdown in price growth provides a basis for the Federal Reserve to lower interest rates. However, the inflation problem has not been completely resolved. Barkin said on Wednesday that the Fed's significant rate cut in September was an adjustment to the current economic situation, not a panic signal for economic slowdown.
In his prepared remarks at the 2024 University of North Carolina Wilmington Economic Outlook Conference in Wilmington, North Carolina, Barkin said: "The withdrawal of this restrictive policy only eased some pressure."
The Federal Open Market Committee (FOMC), the monetary policy-making body of the Federal Reserve, voted on September 18 to lower the federal funds rate target by half a percentage point, to between 4.75% and 5.0%. Barkin has been the Richmond Fed chairman since 2018 and is a voting member of the FOMC this year.
Barkin said: "I believe our decision in September was a recalibration of a slightly easier stance. After maintaining the federal funds rate at a high level of 5.3% for more than a year, the overall inflation rate has approached the target, and the unemployment rate is close to its natural level. The current discordant number is the federal funds rate, which no longer needs to be so restrictive given the progress made."
Advertisement
The dual mandate of the Federal Reserve is to pursue maximum employment and ensure price stability. After two years of fighting inflation, many Federal Reserve officials have recently paid more attention to signs of slowing in the U.S. labor market. However, Barkin is not yet ready to declare victory in consumer price growth.
He said: "There is still a lot of work to be done on inflation. Although the inflation rate has fallen from its high, it is still higher than our 2% target. I expect the core inflation rate will not drop significantly before 2025, as we are still comparing with the low inflation data at the end of last year."
Barkin also analyzed various opposing factors affecting inflation this year and in the next few quarters. Factors suppressing price growth include the promotion of labor supply by increased immigration and higher labor force participation rates, as well as the impact of deflation in Chinese exports. On the other hand, lower interest rates may stimulate demand for housing, automobiles, and other goods that are usually purchased through financing, thereby driving up the prices of these goods.
He believes that the current U.S. labor market is performing robustly, but the trend is not optimistic. Since last year, the unemployment rate has increased, and the monthly hiring rate has slowed. However, layoffs are still rare, as employers seem more cautious about layoffs after experiencing labor shortages during the pandemic.
Barkin pointed out that the labor market faces a double risk, that is, lower interest rates may stimulate demand and increase hiring, or negative trends may further intensify.
He concluded: "Although we strive to contribute to the U.S. economy, we will almost certainly not be perfect. We operate in an environment full of uncertainty, and the task requires us to make trade-offs, and the main tool—the federal funds rate—has a long and uncertain lag effect, and there is no clear endpoint. Therefore, we need to stay vigilant and learn as we go when deciding the speed and magnitude of our movement in this rate-cutting cycle."
Leave a Comment