Policymakers need to retain the option of raising interest rates if inflation does not show sufficient headway in decline, Richmond Fed President Thomas Barkin said Wednesday.
Markets largely expect the Fed has stopped raising interest rates and will start lowering rates in 2024. But Barkin said he was not ready to commit to a particular policy path with so much uncertainty in the air.
“If inflation comes down naturally and smoothly, great, you know, there’s no particular need to do anything with interest rates if inflation comes down,” he told CNBC’s Steve Lessman during an interview at CNBC’s CFO Summit.
“But if inflation were to pick up again, I think you would want to have the option of doing more on interest rates,” Barkin added. “I think the bigger point is that there’s no precision that anyone can point to exactly what level of interest rates deals with inflation and exactly how you want to deal with it. So you’re constantly trying to adapt quickly as you learn more about the economy.”
Barkin spoke shortly after the Commerce Department announced that the economy grew at an annual rate of 5.2% in the third quarter. With growth remaining strong, inflation remains above the Fed’s 2% annual target, although it has shown steady downward progress in recent months. The Fed’s preferred measure of inflation for core personal consumption expenditures showed a 12-month rate of 3.7% in September, and is expected to show a slightly lower reading in October.
Pricing in futures markets suggests the Fed may cut interest rates by up to four times, or a full percentage point, next year. Federal Reserve Governor Christopher Waller said Tuesday he would consider cuts if inflation data shows progress over the next few months.
However, Barkin described the possibility of easing the policy as a “prescient question” which he is not prepared to answer.
“I don’t see there being a right answer on interest rates or a wrong answer on interest rates,” he said, adding that he is “sceptical” about inflation and believes it will be “stubborn” in the future.
Atlanta Fed President Rafael Bostic also offered comment on Wednesday, saying in an article that he sees economic growth slowing significantly and believes inflation will also decline.
“Taken together, research, data, survey results, and input from business contacts tell me that tighter monetary policy and tighter financial conditions more broadly are weighing heavily on economic activity,” Bostic wrote. “At the same time, I don’t think we’ve seen the full effects of restrictive policy, which is another reason why I think we’ll see a further slowdown in economic activity and inflation.”
Bostic said his staff expects inflation to fall to 2.5% by the end of 2024 and then return to the Fed’s 2% target by the end of 2025.
Both Bostic and Barkin will be voters in 2024 on the Federal Open Market Committee, which sets interest rates.