Fed’s Barkin Warns Price Pressures May Persist Longer Than Anticipated, According to Reuters

By Howard Schneider

WILMINGTON, North Carolina – The struggle of the U.S. central bank to bring inflation back to its 2% target may take longer than anticipated, which could limit the extent to which interest rates can be reduced, according to Richmond Federal Reserve President Thomas Barkin.

In an interview, Barkin expressed his support for the recent half-percentage-point rate cut approved by the Fed and indicated that the benchmark rate might decrease by another half-point by the end of this year, reflecting the decline in inflation. However, he voiced concerns that inflation could remain stubborn next year, potentially preventing the Fed from lowering rates as much as some investors and colleagues hope. He suggested that the benchmark rate may ultimately fall short of the "neutral" level many policymakers aim to achieve.

Looking beyond the upcoming months and into mid-2025, Barkin stated, "I’m more concerned about inflation than I am about the labor market." He pointed out that a combination of steady demand and renewed tightness in the job market could hinder the Fed’s efforts to fully reduce inflation.

While he does not foresee a significant rebound in inflation, Barkin acknowledged that the risk of getting "stuck" at suboptimal inflation levels is legitimate, particularly due to external pressures that could impede the final push towards achieving price stability.

The Fed recently lowered its benchmark interest rate to a range between 4.75% and 5.00%, with economic projections indicating that policymakers expect the rate to continue declining through 2025 and into 2026, potentially reaching around 2.9%—a level viewed as neutral for spending and investment.

Barkin anticipates that the Fed may implement a quarter-point rate cut at its upcoming meeting if the unemployment rate and inflation remain stable, a scenario he considers a "reasonable path."

His views contrast with the prevailing market narrative that suggests a consistent path to a neutral interest rate, suggesting instead that the Fed could face a "no-landing" scenario, necessitating challenging decisions by late next year.

Barkin emphasized the influence of upcoming economic behavior on the Fed’s ability to achieve a neutral interest rate, noting that while economic growth is a possibility, there is also the risk of inflation remaining above the desired target. He highlighted that the labor supply may not benefit from the same levels of immigration as before, which could push wages upward as demand persists.

"If demand stays anywhere near healthy, we’re going to use up the available supply of labor," he noted.

He expressed that he would welcome a situation in early 2025 where inflation seems stable, allowing for a return to neutral policy. However, he cautioned that normalization should only occur when there is confidence that inflation is at the target level.

For the upcoming months, Barkin conveyed agreement with the notion that inflation risks remain moderate while unemployment risks are significant. He raised questions about whether the unemployment rate would stabilize or begin to rise.

Barkin pointed out that uncertainty looms regarding potential economic disruptions, such as a port strike on the East Coast and the associated wage demands, which do not appear to signal weakening inflation or economic weakness.

"That feels like wage pressure," he asserted, suggesting that current rate cuts may be viewed as a necessary adjustment in policy rather than indicative of a complete return to normalcy. "My take is dial back the level of restraint, see where you are," he concluded.