Top Fed official warns rates must stay high until inflation subsides

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A senior Federal Reserve official said the US central bank should raise interest rates to a level that restricts economic activity and hold them there until policymakers are “convinced” that inflation galloping decreases.

In an interview with the Financial Times, Thomas Barkin, chairman of the Fed’s Richmond branch, said the central bank had already shifted its monetary policy to much tighter parameters to contain the worst price pressures in about four years. decades.

However, he said that to restore price stability, the Fed should tighten policy further so that so-called real interest rates, which are adjusted for inflation, are above zero.

“You need to move to a level where inflation expectations are falling in order to have enough restraint on the economy to bring inflation down,” Barkin said Tuesday. “The destination is real rates in positive territory and my intention would be to keep them there until we are really confident that we are putting inflation to bed.”

Several of Barkin’s colleagues, including John Williams of New York, have recently indicated that the fed funds rate will likely need to top 3.5% and stay there in 2023. That’s well above its current target range of 2.25. % to 2.50% cent. Cleveland’s Loretta Mester, meanwhile, supported rates topping 4% early next year.

Those levels “wouldn’t surprise me at all,” said Barkin, who indicated that he favored using near-term inflation expectations to calculate what constitutes a positive “real” interest rate.

Regarding how quickly the Fed would need to move to reach such a threshold, he said, “I generally tend to go faster, rather than slower, as long as you don’t inadvertently break something in along the way.”

Barkin’s comments come as Fed officials chart the next phase of their historic tightening cycle, which is already proceeding at the most aggressive pace since 1981.

The policy-setting Federal Open Market Committee faces the choice of implementing a third consecutive 0.75 percentage point increase at its meeting later this month or slowing the pace of adjustments. half a point.

Barkin, who will then be a voting member of the committee in 2024, said he had not yet decided how big the next increase he would support, but stressed the resilience of the US economy and that more work had to be done to cool things down.

“The economy continues to move forward [and] its momentum has not been halted,” he said, noting that the job market is still “very tight.”

More than 300,000 positions were added in August, while, encouragingly, the labor market has gained momentum. As more people looked for work but had yet to find a job, the unemployment rate rose 0.2 percentage points to 3.7%, which remains a historic low.

Barkin, like other Fed officials, is eagerly awaiting the next inflation report, which is expected to be released next week during the central bank’s official blackout period, when public communications are limited.

Price pressures eased slightly in July as energy prices, which had soared following Russia’s invasion of Ukraine, fell. While the annual inflation rate eased slightly to 8.5%, once volatile elements such as energy and food prices were eliminated, “core” inflation showed few signs back.

In a well-attended speech late last month in Jackson Hole, Wyoming, Fed Chairman Jay Powell said the central bank “must keep going” until it restores price stability. .

“What you’re doing is you’re raising and pricing, and you’re raising and pricing,” Barkin said, citing lessons from the 1970s, when the central bank prematurely eased monetary policy before it had completely defeated inflation.

But once rates move beyond ‘neutral’, meaning they don’t boost or dampen growth, Barkin said it would be ‘quite appropriate’ to factor in risks of over-tightening.

Like Powell – who warned last month that bringing inflation under control would likely cause “some pain” for households and businesses given an expected period of slow growth and losses in the stock market. work – Barkin warned that the process would not be free.

An easing of supply chain constraints globally or an influx of new workers into the labor force could help reduce the extent to which the Fed will have to rein in demand, meaning a milder-than-expected economic contraction. .

“The word recession does not necessarily mean a calamitous decline in activity,” Barkin said. “The word recession can mean rebalancing to bring the economy back to normal.”

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