MNI INTERVIEW: Fed's Barkin Says Hikes Not On Set 50BP Course

Federal Reserve Bank of Richmond President Tom Barkin told an MNI podcast Friday interest rate increases are not on a preset course and he would like to see interest rates on a path to normal that is as fast as feasible, backing this week's historic FOMC decision to raise the fed funds rate 50bps, while not ruling out the potential for a supersized 75bp increase if needed.

Given that inflation remains uncomfortably high, broad-based, and persistent and with demand extremely strong, raising rates by 50bps was "pretty straightforward," Barkin said in his first public comments after the FOMC meeting, backing the Committee's move.

Asked whether he'd back two more consecutive 50bp moves, he said: "In my mind, were conditions to stay the same which of course is a pretty big if, I think let's normalize as fast as we can feasibly get there."

But whether the U.S. central bank needs to continue to move beyond estimates of neutral is uncertain, he said. While currently demand and inflation both are pointing in the direction for a relatively quick rise in rates, he said, it's going to depend on the state of the economy and "the time to reassess is when inflation starts to come down or when underlying demand starts to come down, and we'll see what happens then."

NOT RULING OUT 75BP

The Richmond Fed president did not completely rule out a larger 75bp move. "I think anything would be on the table," he said. "I think you've been around me long enough to know I never rule anything out."

"I'll just say our pace is pretty accelerated right now," he added. "If you started seeing signs, as imperfect as inflation expectation assessments are, but if you started convincing yourself that inflation expectations have started to move, that to me is the strongest case to try to move faster."

Chair Jerome Powell earlier this week said a "75 basis point increase is not something the Committee is actively considering."

As to when the Fed would likely need to downshift and begin to hike rates in smaller 25bp increments, Barkin stressed the ambiguity of assessments of neutral. "I'll say I'm sensitive to our inability to understand exactly where neutral is," he said. "As you enter the intersection, you might be more inclined to slow down and look around."

LONG WAY ON QT

And as the central bank is set to begin shrinking its balance sheet June 1, Barkin said markets and the Fed do have a better sense of how quantitative tightening works but acknowledged there is still a learning process. "I remind myself this is only the second time we've done this," he said.

Barkin expressed more confidence that markets can handle QT in its first steps. "It seems odd to me to imagine that there's going to be too much stress removing, taking our balance sheet from USD9 trillion to USD8 trillion. We're at very elevated levels," he said. "We're a long way from the point of what ought to be causing market stress."

"We should and are always concerned about whether there's enough liquidity in the market, whether the markets are going to function in the right way," he said. "To suggest that we know exactly how it's going to play out I think is a little aggressive."