Federal Reserve Bank of Richmond President Thomas Barkin said the central bank may need to raise interest rates to a higher level than previously anticipated should inflation keep running too fast for comfort.
(Bloomberg) — Federal Reserve Bank of Richmond President Thomas Barkin said the central bank may need to raise interest rates to a higher level than previously anticipated should inflation keep running too fast for comfort.
“Inflation is normalizing but it’s coming down slowly,” Barkin said Tuesday in a Bloomberg TV interview with Michael McKee and Jonathan Ferro.
“We may or may not choose to take rates up further if inflation continues to persist but we’ll have to see what happens,” he said. If inflation settles down, borrowing costs may not need to rise so high, but “if inflation persists at levels well above our target, maybe we’ll have to do more.”
Barkin spoke shortly after data showed consumer prices climbed 6.4% in January from a year earlier, still far above the Fed’s goal for 2% annual inflation, which is based on a separate measure. The overall consumer price index climbed 0.5% from the prior month, bolstered by gasoline and shelter costs.
Read more: US Inflation Stays Elevated, Adding Pressure for More Fed Hikes
The Fed increased its policy rate by 25 basis points on Feb. 1 to a range of 4.5% to 4.75% and promised ongoing rate hikes to counter high inflation. Traders on Tuesday were pricing in quarter-point increases at the March and May policy meetings, and near-even odds of another one in June. Fed officials will update their forecasts at the next meeting, which takes place March 21-22.
Barkin doesn’t have a vote on interest rates this year. He noted that additional inflation reports are due before the March gathering and will weigh on his forecasts.
Investors have lifted where they see rates peaking this year and are now broadly in line with policy makers’ projection of 5.1% following stronger-than-expected jobs reports and continued signs of persistently high prices.
Policymakers have been particularly worried by increases in services prices, driven in part by a shortage of workers exacerbated by the Covid-19 pandemic.
Jobs Strength
Fed Chair Jerome Powell has cautioned that an easing in a too-tight labor market would be needed to cool continuing price pressures. Nonfarm payrolls increased 517,000 last month – more than twice the expectations of Wall Street – and the unemployment rate dropped to 3.4%, the lowest since May 1969.
“The risks are on the inflation side as opposed to on the economy side,” Barkin said. “The biggest surprise has been the jobs market” with its unexpected strength, he said.
The Fed has sought to ease wage gains to a level consistent with its 2% inflation goal. The jobs report showed average hourly earnings rose 0.3% from December and up 4.4% from a year earlier, yet the prior month was revised higher.
There are some indications that economic growth could be more resilient than expected, or even accelerating. The Atlanta Fed’s tracker has put an early estimate of first-quarter gross domestic product at 2.2%, as of Feb. 8.
“You have seen demand moving very quickly” in some sectors, Barkin said.
(Updates with additional comments.)
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