MNI: Fed's Barkin Wants Continued 25BP Hikes

Federal Reserve Bank of Richmond President Thomas Barkin said Friday steady quarter-point interest rate increases until inflation is on a sustainable path back to 2% provides the best flexibility for the Fed to respond to incoming data.

"I’m not a person who thinks the way to operate monetary policy is to move quickly to a terminal rate and then pause. That theory to me requires more confidence and understanding the neutral rate and understanding lagged effects than I have," he told reporters after a talk at the Rosslyn Business Improvement District.

"I like the 25bp path because I believe it gives us the flexibility to respond to the economy as it comes in. That means I’m comfortable raising rates potentially more often to a higher level if inflation were to come in hot and I'm comfortable backing off if not."

The FOMC raised interest rates by 25 bps earlier this month and is expected to do so again in March, taking the fed funds rate target to 4.75%-5%.

STRONGER DATA

The recent string of stronger-than-expected data on consumption and the labor market should be taken with a grain of salt, Barkin said. Seasonality adjustments likely distorted the true signal on retail sales growth and hiring, as the Christmas shopping season has lengthened and the country experienced warmer weather last month.

"I’m not taking as much signal from the data on the demand side as much as you might, because of seasonality," he said.

"Two weeks ago if you looked at the data, the story seemed pretty consistent and pretty clear. Inflation was settling, labor market cooling, demand cooling, supply chain normalized, and it was probably too clear for a world the Chair [Powell] described as bumpy," he said. "The answer will become clear with time."

However, inflation was stronger than expected in January, especially the trimmed mean and median measures, meaning the Fed has more work to do, Barkin said. (See: MNI: Fed's Peak Rate Looking Perkier As Jobs Boom-Ex-Officials)

"I've never been ready to declare victory on inflation. I’m still not ready," he said. "Moving inflation back to target will require more rate increases. How man of those I think we’ll have to see. It’s hard for me to take too much signal from January. You have to stay grounded."