The Fed's Barkin says rate pressures may not ease as quickly as expected By Reuters

Written by Howard Schneider

WILMINGTON, North Carolina (Reuters) – The U.S. central bank's battle to return monetary policy to its 2 percent target may take longer than expected to finish and determine how far interest rates can be cut, Richmond Federal Reserve President Thomas Barkin said on Wednesday.

In an interview with Reuters, Barkin said he supports the half-percent rate cut the Fed approved last month and admitted that the rate may be lowered by another half-percentage point by the end of this year to see how far inflation reaches. he refused.

But he said he was concerned that inflation could prove strong next year and prevent the Fed from cutting rates as investors and some of its counterparts expect, as the rate is likely to reach the “neutral” level that many policymakers expect to reach.

After the next few months and into the second half of 2025, “I'm more concerned about inflation than I am about the labor market,” Barkin said, with the combination of continued strong demand and renewed tightness in the labor market making it difficult. for the Fed to go the “last mile” in reducing inflation.

“I'm not talking about a big restart … But I think attachment is a real danger,” he said after a speech at an economic conference organized by the University of North Carolina Wilmington. “There is pressure against us to go the last mile.”

The Fed lowered its benchmark interest rate to 4.75% – 5.00% at its meeting last month, and new economic projections showed policymakers expect the rate to drop in 2025 and 2026 to around 2.9% – a “neutral” rate. which is perceived as discouraging or discouraging spending and investment.

The Fed is expected to cut interest rates by a quarter point at its Nov. meeting. 6-7, a move Barkin says will be a “sensible move” if unemployment and inflation remain stable, as he expects.

Barkin's views are a variety of the market's narrative that the Fed is on a steady path to a neutral rate, assuming that, instead of a “slow decline” from money, where inflation is controlled without a painful collapse, the central bank. may face a “no-show” situation and potentially uncomfortable choices late next year.

'MONEY PRESSURE'

Barkin said the Fed's ability to reach a neutral interest rate largely depends on how the economy behaves before the second half of 2025, which could hold hope for continued economic growth but risks of inflation being set above the central bank's 2% target.

In particular, he said that immigration may not provide the same strength in labor supply as it has in recent months, allowing growth without excessive pressure on wages, consumers may be encouraged by lower prices to buy big-ticket items such as houses and cars, and the rest of the world. risks including globalization and the outbreak of regional military conflicts could bring unexpected price shocks.

“As long as the demand stays close to health, I think we're going to use what's available” in the labor force, Barkin said.

“No one can be too happy if we go into the first quarter and inflation continues to look good, and that would give you the confidence to say … 'lets go back to neutral,'' he said.

But “the normal situation comes when you are confident that inflation is up to 2%,” Barkin said, adding that he remains “open-minded” about how quickly rates can fall and whether they can be cut to a point where monetary policy is not stimulating or disincentive. prohibiting shopping and spending.

For the next few months, Barkin said he agreed that the risks are “modest to inflation and meaningful to unemployment,” with an open question as to whether the unemployment rate will decline from here, as he expects, or start to rise.

From there, he said things are less certain, and noted that the port strike that began on the US East Coast and Gulf Coast this week, and the 50% or more wage increases that were discussed as possible to fix it, did not materialize. such as evidence of inflation or a weak economy.

“That sounds like wage pressure,” Barkin said, and reason to view the current rate cuts as a policy “reset” that may or may not give way to a full “normalization.”

“My take​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ is is restore the level of self-control, see where you are at,” he said.