Strong US Data Makes ‘Reacceleration Scenario’ Possible, Says Fed’s Barkin

By Howard Schneider

DANVILLE, Virginia (Reuters) – The Federal Reserve needs to consider the possibility that the economy may begin to reaccelerate rather than decelerate, which could have significant implications for the central bank’s efforts to control inflation, according to Richmond Fed President Thomas Barkin.

In an interview, Barkin noted that U.S. retail sales data for July exceeded expectations, and increased consumer confidence has made the scenario of economic reacceleration a real possibility, unlike three or four months ago. He emphasized that this might lead to a situation where "inflation stays high and the economy strengthens." He stated that if he becomes convinced that inflation remains elevated without signs of a drop in demand, it would support the case for tightening monetary policy further through increased interest rates.

Retail sales saw a 0.7% increase in July, significantly surpassing projections, while the economy recorded a 2.4% annualized growth rate in the second quarter, considerably above the rate that Fed officials believe would allow inflation to ease.

Barkin highlighted that the potential for a strengthening economy expands the range of possibilities beyond the Fed’s recent considerations of a recession or a "soft landing," where inflation decreases without triggering an economic downturn.

He refrained from making predictions about the central bank’s actions at the upcoming meeting, where it is generally expected that the overnight interest rate will remain steady in the 5.25%-5.50% range. Although inflation has moderated recently, it remains significantly above the Fed’s target of 2%, and additional data on jobs and prices may influence decisions in the next policy session.

Officials are also examining how well the economy has absorbed the substantial rate hikes implemented by the Fed since it began raising rates in March 2022. Since the last policy meeting in July, bond yields for both long-term and 2-year Treasuries have risen sharply, leading to increased borrowing costs for both households and businesses.

Barkin indicated that recent market trends haven’t prompted concerns about overly rapid tightening of financial conditions. He remarked that he does not find a 10-year Treasury rate exceeding 4% to be inappropriate, given the current policy rate of the Fed. He expressed that the rise in rates appears to align with the strength of economic data, suggesting that if consumer spending and retail sales remain robust, such rates may be justified.