Federal Reserve Bank of Richmond President Thomas Barkin said inflation has been slowing down and the central bank doesn’t need to raise interest rates as aggressively as it did last year.
(Bloomberg) — Federal Reserve Bank of Richmond President Thomas Barkin said inflation has been slowing down and the central bank doesn’t need to raise interest rates as aggressively as it did last year.
“Now, with forward-looking real rates positive across the curve and therefore our foot unequivocally on the brake, it makes sense to steer more deliberately as we work to bring inflation down,” Barkin said in remarks to the Virginia Bankers Association and Virginia Chamber of Commerce. Barkin doesn’t vote on monetary policy this year.
US central bankers next meet Jan. 31 and Feb. 1, and investors expect it’ll result in a 0.25 percentage point interest-rate increase after a report Thursday showed inflation moderated further in December.
As the economy enters 2023, Barkin told reporters after the event he’s thinking about an interest-rate path that is “slower, but longer and potentially higher” as well as “one that reacts to inflation” as it comes in. He expects to see wage pressures at least through the first quarter.
Downshifting Hikes
The Fed raised rates rapidly last year to a range of 4.25% to 4.5% as they fell behind inflation which soared to a four-decade high. After a string of 75 basis-point moves, they’ve since downshifted in the wake of evidence that price pressures have peaked.
However, Barkin noted that while inflation is slowing, it’s still too high.
“I would caution that while the average dropped, the median stayed high,” Barkin said. “That’s because the average was distorted by declining prices for goods like used cars that escalated unsustainably during the pandemic.”
Regarding the median inflation rate, “if the center of the distribution remains above our target, then I think we should continue to move rates,” Barkin said. “Inflation is going to be more persistent than a simple drop down to 2%.”
Terminal Rate
Policymakers have emphasized that the ultimate level of interest rates, which most see going above 5% this year, matters more than the pace of tightening.
Earlier Thursday, Philadelphia Fed President Patrick Harker said the central bank should lift interest rates in quarter-point increments “going forward.” His St. Louis counterpart James Bullard said the Fed should raise interest rates above 5% expeditiously to ensure price pressures are subdued.
Barkin also said he favors a Fed balance sheet consisting of mostly Treasuries, and using those securities as the primary tool for quantitative tightening and easing.
Excluding food and energy, the so-called core CPI rose 0.3% last month and was up 5.7% from a year earlier, the slowest pace since December 2021. That’s still far above the central bank’s target of 2%, which they measure on a different price index.
That metric, the personal consumption expenditures price index, will come out with December data before the Fed’s next gathering. Policymakers will also see the employment cost index for the fourth quarter, which will be released at the start of the two-day meeting.
(Updates with comments to reporters)
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