Fed’s Barkin States Rates Were ‘Out of Sync’ Before September Cut; Inflation Battle Ongoing

By Howard Schneider

WILMINGTON, North Carolina – The recent half-percentage-point interest rate cut by the U.S. central bank signals that its policy rate was not aligned with the current economic conditions, according to Richmond Federal Reserve President Thomas Barkin. However, he emphasized that this move does not indicate that the struggle against inflation has concluded.

With inflation rates decreasing and unemployment hovering around sustainable long-term levels, Barkin noted that the federal funds rate previously appeared too high and restrictive in light of the economic progress. He made these comments during a prepared speech at an economic conference at the University of North Carolina Wilmington.

He mentioned that expectations of an additional half percentage point reduction by the Fed later this year could help temper economic pressures.

Barkin, who is involved in shaping the Fed’s interest rate decisions this year, endorsed the recent cut implemented on September 18. It is anticipated that the Fed will lower rates by a quarter of a percentage point during its upcoming meeting on November 6-7, bringing the benchmark rate down to the 4.50%-4.75% range. Prior to this meeting, crucial employment and inflation data for September and October will be released, along with an assessment of the impact from a strike affecting ports on the U.S. East and Gulf Coasts and the potential implications of escalating conflicts in the Middle East.

Despite the positive economic growth, Barkin expressed caution regarding inflation, suggesting that the job market might tighten rather than weaken in the near future. He stated, "There is still work to do on inflation," highlighting that the core personal consumption expenditures price index remains at 2.7%, and he does not foresee a significant decline in this figure until next year.

The Fed aims for a headline inflation rate of 2%, and the core PCE metric serves as an indicator for future inflation trends. Barkin acknowledged that while some economic indicators suggest ongoing disinflation, it is premature to declare victory in the fight against inflation.

He pointed out that recent interest rate cuts could encourage spending on large purchases, thereby potentially overstimulating demand. Additionally, ongoing labor unrest and geopolitical tensions could further elevate prices.

Barkin also indicated that the job market may evolve unpredictably. While discussions within the Fed have focused on keeping the unemployment rate, currently at 4.2%, from rising, Barkin contended that sustained economic growth and rising demand could lead employers, who are operating with minimal staff, to face labor shortages and require additional hiring.

"As we navigate the pace and extent of this rate-reduction cycle, we need to remain responsive and learn from the unfolding situations," he concluded.