MNI: Fed Rates Well-Positioned To Respond To Risks - Barkin
MNI (LONDON) - The Federal Reserve is well positioned to respond to either a U.S. labor market that continues to weaken or a scenario in which demand stays strong and upside inflation risks are revived, Richmond Fed President Tom Barkin said Tuesday.
The Fed has cut its benchmark interest rate by 75 bps this fall from its post-Covid peak as inflation fell and the labor market normalized.
"With the economy now in a good place and interest rates off their recent peak but also off their historic lows, the Fed is in position to respond appropriately regardless of how the economy evolves. After the challenges of the last several years, that’s a good place to be," he said in remarks prepared for the Baltimore Together Summit in Baltimore, Maryland.
The unemployment rate at 4.1% is solid but has been rising over the past year. Core inflation has come down to 2.7% but remains above the 2% target. "Tomorrow looks different based on whether you take more signal from levels or trends," Barkin said.
"The labor market might be fine, or it might continue to weaken," he said. "Inflation might be coming under control, or the level of core might give a signal that it risks getting stuck above target."
SCENARIO
In one potential scenario, employers start to feel more comfortable investing in the future and hire to ensure they can meet robust demand. "Real wages stay healthy. Workers stay employed and continue to spend. The Fed’s focus would be more on upside inflation risks," he said.
A more pessimistic story sees firms cutting costs and laying off workers to maintain margins, causing spending to suffer. "The net is likely disinflationary, so the Fed’s focus would turn more to downside employment risks," Barkin said.
"Where does that leave us? If I had told you two years ago that we would be where we are today, you wouldn’t have believed me. And to be fair, I didn’t predict it either. So, I am going to resist giving you a forecast today," he said. (See: MNI FED WATCH: 'No Effect' From Trump Win On Near-Term Policy)