MNI: Barkin Sees Gradual Unwind Of Fed's Extraordinary Support

Richmond Federal Reserve President Thomas Barkin Friday said the central bank's "gradual" interest rate path shown in forecasts this week depicting seven interest rate increases will not drive an economic decline, while the normalization of the balance sheet can work in the background and will begin soon.

Expressing confidence that market-based and long-term consumer inflation expectations have remained anchored, Barkin said the Fed is reducing "support gradually so that we can get back to a more normal position as the economic situation evolves. At that time, we can decide if we need to put the brakes on the economy or not," he said.

"Prior to our meeting, there was much debate about whether the Fed should move faster. We have moved at a 50-basis point clip in the past, and we certainly could do so again if we start to believe that is necessary to prevent inflation expectations from unanchoring," he said.

"The rate path we announced this week shouldn’t drive economic decline. We are still far from the level of rates that constrains the economy; for my colleagues on the FOMC, this would be somewhere above their long-term projections for the neutral rate, which ranges from 2-3 percent," he said.

"This week’s move still leaves us a good 9-10 rate increases away from that point. So, instead of thinking about the upcoming cycle of rate increases as foreshadowing a coming recession, think of it as an indication that the extraordinary support of the pandemic era is unwinding," he said in prepared remarks in a speech to the Maryland Bankers Association.

"As we start to normalize rates, it is appropriate to start to normalize the balance sheet as well, and we will begin to do that soon," he said. "While the proven and more important tool is rates, our balance sheet moves can work in the background to reinforce this rate path."

"For me, it’s pretty simple: Our purchases reduced rates in a modest fashion; our reductions should have a symmetric effect and increase medium-term rates modestly, thereby supporting our desired rate trajectory," said Barkin, a 2024 FOMC voter.