MNI: Fed's Barkin Supports Slower Hikes, Can Do More If Needed

Slowing the pace of interest rate increases gives the Fed more time to assess data, and the Fed can "do more" if slowing demand isn't translating into lower inflation, Federal Reserve Bank of Richmond President Thomas Barkin said Friday after the FOMC opted not to raise rates again at its June meeting.

"With forward-looking real rates now positive across the curve, we have been moderating the pace of those increases. Think of it as slowing your boat as you approach the dock. That gives us time to assess the data on demand and inflation and determine what more we might need to do," he said in remarks prepared for the Maryland Government Finance Officer Association.

"I am still looking to be convinced of the plausible story that slowing demand returns inflation relatively quickly to that target. If coming data doesn’t support that story, I’m comfortable doing more."

The experience of high inflation in the 1970s shows backing off inflation too soon risks inflation coming back stronger, he added, requiring the Fed to do more with even more damage. "That’s not a risk I want to take," he said.

LABOR MARKET STRENGTH

Inflation has proven stubbornly persistent, Barkin said. Softening demand should feed through to inflation, but consumer spending is "not yet weak." The May CPI report showed headline inflation was 4.0% and core 5.3%, far from the Fed's 2% target.

The pandemic may have made the labor market more resilient, he said. Higher-income consumers are still spending, and higher wages are supporting consumption. Credit and debit card data shows year-over-year spending has been roughly flat since February. Recent layoffs have targeted administrative workers who may have a lower propensity to file for unemployment, typically are unemployed for shorter periods, and often have backup savings, he said.

"The question is whether inflation can settle while higher-income consumers are still spending, and the labor market remains this robust. We will learn a lot more over the next few months," he said.