MNI INTERVIEW: Fed's Barkin 'Very Open' To More Tightening

Nascent signs of cooling consumer demand may already be pulling down price pressures, meaning the Federal Reserve can hold interest rates where they are, but Richmond Fed President Thomas Barkin is "very open" to supporting more rate rises should the data tell a different story, he said in an interview late Friday.

The Fed's rate hikes over the past year are having an effect on consumer spending and the labor market with more to come, and the recent banking turmoil is prompting lenders to tighten credit standards, all of which should help tame inflation, Barkin said.

"There’s a story out there that’s quite plausible: The lagged effect of rate moves combined with credit tightening in the economy combined with the erosion of pandemic-era stimulus will bring demand down and inflation down relatively quickly. But I still want to be convinced," he said.

"For me it will depend on what I learn about how much does demand cool and how much does that demand cooling bring down inflation. If inflation doesn’t seem to be coming down as expected, I’m very open to more tightening. On the other hand, if things play out in a way that gives me comfort that inflation is moving in the right direction toward our target, then I’m very comfortable waiting."

PRICING POWER

Federal Reserve Chair Jerome Powell this month signaled the central bank may hold off on further hikes after raising their benchmark overnight rate to a range of 5% to 5.25%, but a couple FOMC officials have already expressed doubt that inflation is under control, warning that tighter policy may be needed.

Barkin said he is "pretty comfortable with data dependence as opposed to the forward guidance model," given the uncertainty of the impact of policy lags and credit conditions as well as external factors like the debt ceiling showdown in Washington.

Measures of underlying inflation remain elevated at the "high 4s," and the monthly core inflation readings are "not consistent with what I want them to be," Barkin said. (See MNI INTERVIEW: Sticky Prices Could Require More Hikes-Fed Econ)

The past two years of high inflation "has led firms to believe that pricing is more of a lever than they thought three or four years ago." Consumer facing firms are reporting price growth of 12% to 13% plus volume growth, he said.

"You're really looking for those folks who are selling directly to consumers to reach the point where they go, 'I don't think I can raise price anymore.' And I did not pick that up" in annual reports over the past few week, Barkin said. "Again, there's a very plausible story that they will pull back relatively soon. It could be happening now, as demand is cooling."

A LITTLE LESS LENDING

Consumer spending data has been "flattish" in February and March after being quite elevated in January, and real-time data on credit card transactions have "definitely cooled" in April. People are spending down their excess savings while some fiscal supports have ceased, and credit tightening will help slow demand further, Barkin said.

The Richmond Fed district is home to some of the largest U.S. lenders like Bank of America and Capital One but also a number of smaller banks, which have told supervisors that deposit flows are stable and they’ve invested in building the liquidity they need, he said.

Credit conditions were already tightening before Silicon Valley Bank failed, and the Fed's survey of lending released several weeks after SVB "looked like a modest additional tightening but not something outsized," Barkin said. Given rising funding costs, banks "on the margin are making sure they’re absolutely comfortable with each credit they issue. What I hear people say is: We're just taking a second look at marginal credit. The natural implication of that is you do a little less lending."

Businesses in the Richmond Fed district continue to complain that they're short of workers, Barkin said, in line with labor market indicators pointing to a cooling "from red hot to merely hot." Secondary indicators like job openings, quits rates and jobless claims are moving in the right direction, but "it's hard to ignore a 3.4% unemployment rate, the lowest since May 1969," and still high wage growth figures, he said.