“We are making real progress,” Barkin, a voting member this year of the Federal Open Market Committee that sets interest rates, said in remarks prepared for a speech in Raleigh, North Carolina. “Inflation continues its journey back to normal levels while the economy remains healthy. You can see that.”
Inflation, as the Fed's preferred measure of personal consumption expenditures prices, rose 2.6% in November from a year ago, and rose 3.2% excluding food and energy. That's well below the peak reached in mid-2022 but still above the Fed's 2% target. However, Barkin noted that the six-month PCE inflation rate stands at 1.9%.
He compared the Fed's job to a pilot bringing a plane to land, and pointed to four risks ahead: the economy could “run out of gas” and growth could reverse; “unexpected disruptions” such as geopolitical events or the March 2023 banking shock; the possibility of “approaching the wrong airport,” as inflation remains above the Fed’s 2% target; and “deferred decline,” where demand remains unexpectedly high, leading to higher inflation.
“The airport is looming,” Parkin said. “But landing a plane is not easy, especially when the forecast is foggy, and headwinds and tailwinds can affect your course.” “It's easy to over-direct and do too much or under-direct and do too little.”
The speech comes three weeks after the Federal Open Market Committee again decided not to raise interest rates, for the third time in a row.
Along with this decision, committee members proposed three quarter-point rate cuts in 2024. This is a less aggressive path than market prices indicate, but it still represents an important policy pivot from the Fed, which has raised interest rates 11 times for a total 5.25 percent. point since March 2022. Market prices currently point to six cuts this year, according to CME Group FedWatch A measure of federal funds futures activity
Barkin did not indicate where his “dot” was on the matrix of dots that the Fed closely follows on raising interest rates for individuals. However, he pointed to the risk that the central bank's mission to reduce inflation may not end.
“Long-term interest rates have fallen recently, which may stimulate demand in interest rate sensitive sectors such as housing,” he said. “While you might think this would be a first-order problem, strong demand is not the answer to above-target inflation. That's why the possibility of additional interest rate hikes remains on the table.”
Barkin's comments come on the same day that the Federal Open Market Committee will release minutes from its December 12-13 meeting that should provide further insight into policymakers' thinking about where interest rates are headed.
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