Inflation remains “stubbornly high” and not slowing fast enough to reach the 2% target

WASHINGTON — The president of the Richmond branch of the Federal Reserve says he favors lowering the central bank’s key interest rate “somewhat” from its current level, but he’s not yet ready to do so. that the Fed completely eases off the brakes on the economy.

In an interview with The Associated Press on Thursday, Tom Barkin also said the economy was showing “impressive strength,” pointing to recent strong reports on retail sales, jobless claims and growth in the economy. during the April-June quarter, which reached a good rate of 3%.

“With inflation and unemployment so close to normal levels, it is acceptable to reduce the level of restraint somewhat,” Barkin said, referring to reductions in the Fed’s key interest rate. “I am not yet ready to declare victory over inflation. So I wouldn’t completely bring it back to a level that no longer restricts the economy, which economists call “neutral.” Estimates of the neutral rate currently range between 3% and 3.5%, well below the current benchmark rate level of 4.8%.

Barkin’s caution contrasts with that of some of his fellow Fed policymakers who have expressed greater urgency on lowering rates. Fed Governor Adriana Kugler said Wednesday that she “strongly supports” the Fed’s larger-than-usual half-point interest rate cut last week after a peak of 5.3% in two decades, and added that she would support “further reductions” as long as inflation continues to fall.

And Austan Goolsbee, president of the Fed’s Chicago branch, said Monday that there would likely be “many more rate cuts over the next year.”

Barkin was one of 11 Fed policymakers who voted for the Fed rate cut, while Gov. Michelle Bowman dissented in favor of a smaller quarter-point cut.

In the interview, Barkin said a key factor in his support was the relatively modest path of rate cuts the Fed projects for the rest of this year and through 2025 in a set of projections released Sept. 18. reductions of one point later this year and four next year, fewer than many investors and economists expected.

These projections show a series of “very measured” rate cuts, as well as a “reasonably positive outlook” on the economy, Barkin said, and have helped counter any perception that the Fed’s sharp rate cut this month reflected a “panic” about the economy.

Barkin said inflation should continue to ease in the near term, but he sees a risk that it could prove stubborn next year. Conflict in the Middle East could push up oil prices, leading to higher inflation, and lower interest rates could accelerate purchases of homes and cars, leading to higher prices if the offer does not follow.

“Inflation is still above target,” Barkin said. “We need to stay mindful of that.”

Barkin said he sees the Fed reducing borrowing costs in two phases, starting with a “recalibration” as rates are higher than necessary given the decline in inflation over the past two years. Inflation has fallen sharply, from a peak of 7% in 2022, according to the Fed’s preferred gauge, to around 2.2% in August.

But only if inflation continues to fall steadily next year will he support a “normalization” of rates, under which the Fed could cut its rate to a “neutral” level, Barkin said .

Barkin also spends a lot of time discussing the economy with businesses in the Fed’s Richmond District, which includes Maryland, Virginia, North Carolina, South Carolina, the District of Columbia and most of West Virginia. Most of his recent conversations have been reassuring, he said. Although hiring has clearly slowed, the companies he speaks with are not currently planning job cuts.

“I push them really hard,” he said. “I have a hard time finding anyone who is making layoffs or even planning layoffs.”

“Part of the reason is that their business is still healthy,” he added. “Why would you make layoffs if your business is still healthy? This is partly because having been cash strapped during the pandemic, they are hesitant to find themselves cash strapped again. »