Fed should lower rates as economy normalizes, Barkin says

Federal Reserve Bank of Richmond President Thomas Barkin said the central bank can lower interest rates as the economy normalizes and confidence grows about the downward path of inflation.

“I don’t have any objection conceptually to toggling rates back toward normal levels as you build increasing conviction and confidence that inflation is on a convincing path back to your target,” Barkin, who is a voting member of the Federal Open Market Committee this year, told reporters Friday.

“We should normalize rates as the economy gets back to normal,” he said.

Barkin said the first three months of this year will provide critical inputs to his own thinking on inflation, given many businesses use the calendar turn to impose price increases. Business contacts in his district suggest the impetus to increase prices is still present in some sectors of the economy, he said.

“A lot of these price increases happen at the first of the year,” he said following a speech to the Maryland Bankers Association. “The success or not success of these efforts to increase prices at the beginning of the year is going to be important.”

The Richmond Fed president told reporters that the labor market seems to be normalizing, not weakening, and is trending in a steady, softening pattern. Given businesses’ hiring challenges in recent years, Barkin added that he expects a “less pronounced labor market softening” should there be a gradual downturn.

“I do believe there is going to be more labor hoarding than there was,” he said. “If you spent as long as people did trying to catch up on workforce, you are just a little more respectful of that challenge.”

Data out earlier Friday showed US job growth picked up in December, and wages rose at a faster-than-forecast clip. While traders still anticipate the Fed will sharply cut the benchmark lending rate by year end, the odds of a March cut eased following the report.

When asked about the possibility of an interest-rate cut in March earlier this week, Barkin said, “I try not to prejudge meetings.”

The Richmond Fed president has been wary about the trajectory of inflation and has cautioned that there are several paths the economy could take. He indicated in his prepared remarks, which repeated a speech Barkin gave on Jan. 3, that the path of inflation and the economy “will determine the pace and timing of any changes in rates.”

Barkin said he sees a re-acceleration in the economy as less likely.

In the past six months, the pullback in inflation has been driven by goods prices, he told reporters. The risk, however, is that trend is more of a one-time help, he said.

On a six-month annualized basis, the Fed’s preferred inflation gauge, minus food and energy, rose just 1.9% in November. That was the first time in more than three years that the measure was below the Fed’s goal.

US central bankers have indicated that their benchmark lending rate is probably at its peak at 5.25% to 5.5%, minutes from their December meeting showed.

Despite the restrictive policy, officials forecast a near perfect landing for the economy in 2024 with growth slowing to 1.4% and annual inflation sliding down to 2.4%, minus food and energy, with little cost to employment. The median estimate was for three interest-rate cuts this year.

–By Craig Torres (Bloomberg)