MNI: Fed's Barkin Not Yet Convinced Inflation On Path To 2%

Federal Reserve Bank of Richmond President Tom Barkin told an MNI Webcast on Thursday he is not yet convinced inflation is on a path to 2% but is uncertain whether the Fed has to do more to slow the economy further.

"Whether a slowdown that settles inflation requires more from us remains to be seen, which is why I supported our decision to hold rates at our last meeting," he said in prepared remarks. "With rates restrictive and financial conditions tightened, we have time to reconcile competing narratives on demand and to test different views on the trajectory of inflation."

"I’m not yet convinced that inflation is on a smooth glide path down to 2%. The inflation numbers have come down, but much of the drop has been the partial reversal of COVID-19-era goods price increases driven by elevated demand and supply shortages," he said. "We’ve come a long way quickly, but the job isn’t done."

(See: MNI: Yield Spike Cuts Chance Of Fed Dec Hike, Q1 Still In Play)

WALK A FINE LINE

Barkin said the central bank is making "real progress" but inflation remains too high. In September, 12-month headline PCE inflation was 3.4%, down considerably from its peak of 7.1% in June 2022. Core inflation was 3.7% over the past year, falling in the last three months to 2.5% annualized, he said.

The Fed has to walk a fine line, the Richmond Fed chief said. "If we undercorrect, high inflation could return, as happened in the ’70s. If we overcorrect, we do unnecessary damage to the economy. And even the best policy has the potential to be waylaid by external events, as we’ve been reminded with the recent news from the Middle East."

Barkin acknowledged recent economic data shows the economy has remained remarkably healthy, with strong demand, robust consumer spending and a resilient labor market. But he said he is hearing a different story on the ground in his district, with interest-insensitive sectors feeling the impact of higher rates, excess savings largely spent down, lower-income consumers stretched thin, and banks feeling margin pressure.

"I do anticipate some sort of a slowdown, as I just have to believe the net impact of all this tightening will eventually hit the economy harder than it has," he said. "I see that slowing as part of what it takes to bring inflation back to target" and "I fear more will have to happen on the demand side to convince price setters the inflation era is over."