On Friday, Richmond Federal Reserve Bank President Thomas Barkin called for the Federal Reserve to implement deliberate rate hikes to combat inflation that he describes as “exhausting” for consumers and workers. Despite acknowledging that inflation may have peaked, Barkin believes that it may not recede quickly and that the central bank will need further rate hikes to bring inflation back down to its 2% goal. Barkin’s concerns are in line with the Fed’s preferred year-over-year gauge, which recorded a 5.4% inflation rate in January.
Barkin also acknowledged that the labor market is “quite tight,” with unemployment rates as of January 2022 at the lowest since 1969, prompting businesses to bank on the ability to raise prices, further putting upward pressure on inflation. He also said that workers were asking for higher pay, exacerbating the inflation problem. Barkin suggested that two years of high inflation have been exhausting for consumers seeking better deals, as paychecks no longer go as far.
Barkin’s speech comes after the Federal Reserve projected in December that it would raise the top Fed funds rate to 5.1% this year, although many analysts and financial market participants now think the Fed will need to push it higher. Barkin did not specify how high he expects rates to need to rise, but he suggested that it could be as high as 5.5%-5.75%.
Deliberate Rate Hikes vs Data dependence
Barkin emphasized the importance of data dependence in raising interest rates, suggesting that the central bank needs to move more deliberately than it did last year when it raised the Fed’s policy target from near zero to its current 4.5%-4.75% range in less than 12 months. He noted that if he is right and inflation persists, the central bank can react by raising rates further. However, he expressed doubt that the process of bringing down inflation would be quick, adding that he is confident that it will happen in time.
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In conclusion, Barkin’s speech highlights the Federal Reserve’s concerns about inflation and the need to tackle it with deliberate rate hikes. The central bank has been clear that it does not anticipate rate cuts this year and that it will likely continue raising rates to combat inflation. This suggests that the Fed’s monetary policy will continue to be data-driven, and the central bank will take a gradual approach to interest rate increases.