Fed’s Barkin wants more ‘conviction’ on inflation before rate cuts can begin

Richmond Federal Reserve President Tom Barkin said Tuesday the central bank has made good progress on bringing down inflation, but he needs to see more consistency in the data before rate cuts can begin.

“I think we’re nicely positioned now with a 3% inflation rate moving down, and a 3.7% unemployment rate staying relatively steady,” Barkin told Yahoo Finance Live in an exclusive interview.

Barkin’s comments come after the central bank signaled at its last meeting of the year that the peak may have been reached on rates and officials penciled in a median of three rate cuts for next year.

Federal Reserve Bank of Richmond President Thomas Barkin poses during a break at a Dallas Fed conference on technology in Dallas, Texas, U.S., May 23, 2019.  REUTERS/Ann Saphir

Federal Reserve Bank of Richmond President Thomas Barkin. (Ann Saphir/REUTERS) (REUTERS / Reuters)

Barkin — who will be a voting member of the Fed’s interest rate setting committee next year — stopped short of endorsing expectations of cuts in 2024, saying he needs to see if inflation and the economy evolve as expected.

“If you’re going to assume that inflation comes down nicely, then of course, we’d respond appropriately …[But,] I’ve got a perspective that inflation is a little stubborner than I think the average person is in there and I hope I’m wrong on that.”

Barkin is the latest Fed official to offer up cautionary commentary about the future direction of rates following a market rally triggered by investor optimism that the central bank will begin cutting as early as the first quarter.

Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards

Chicago Fed President Austan Goolsbee said in a media interview that the Fed had not pre-committed to cutting interest rates soon or swiftly, while New York Fed President John Williams said in a separate interview that it was “premature” to talk about a rate cut in March.

Cleveland Fed President Loretta Mester told the Financial Times that markets had gotten “a little bit ahead” of the central bank.

One official, San Francisco Fed President Mary Daly, was more willing this week to acknowledge that cuts are on the table if inflation keeps tumbling. She told the Wall Street Journal that it was appropriate to begin the rate-cut discussion given the progress on inflation.

Story continues

Markets are pricing in more cuts than the Fed expects next year, and investors predict the loosening will begin in March.

But Barkin said Tuesday that he needs more “conviction” that inflation is returning to the Fed’s target of 2%.

The data, he said, has jumped around, pointing to differences in October and November. What he wants to see, he added, is that the services component of inflation — like the prices of haircuts, for example — follow the same downward path already taken by goods like washing machines and cars.

“We’re not yet done with inflation. I’m hopeful the numbers will come down over the coming months,” he said.

The latest reading on inflation measured using the Fed’s favored inflation gauge — the Personal Consumption Expenditures index minus volatile food and energy prices — stood at 3.5% for the month of October, down from 3.7% in September and 4.3% in June.

A reading on this gauge for the month of November, due out Friday, is expected to show further progress, clocking in at 3.4%.

Barkin said the November reading on PCE due out this Friday could offer six months of numbers in the range of the Fed’s 2% target. Though he noted that he expects inflation to fall as the comparisons from previous years will be easier. From there he needs to see how strong demand is in the economy.

Barkin thinks demand is normalizing. This fall, Barkin said he thought the official economic data was stronger than what he was hearing anecdotally on the ground in his district. But now he said he thinks the economy is normalizing from the torrid pace of over 5% growth seen in the third quarter.

“If the inflation stays in line with what we’ve been seeing in the last several months, that would be great,” he said. “If it doesn’t, you know, we’ll know something else.”

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