© Reuters. FILE PHOTO: 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/File Photo
PALO ALTO, California (Reuters) – Richmond Federal Reserve Bank President Thomas Barkin said on Friday that he could envision a scenario where the central bank pushes the U.S. benchmark policy interest rate to the 5.5%-5.75% range that some in financial markets are now betting it will.
“That would suggest inflation was in fact more persistent than a lot of people are forecasting,” Barkin told reporters after a talk at the Stanford Institute for Economic Policy Research in which he outlined why he personally worries inflation will be slow to cool, forcing the Fed to raise rates more.
“It’s not what I’m hoping for but I could certainly imagine it,” he said. “My hypothesis has been that now that we have gotten ourselves into restrictive territory, as we did last year, we have the opportunity to, I’ll call it, test and learn what happens to the demand, what happens to employment, what happens to inflation, as rates go up at a more gradual pace than they did last year.”
Barkin said it’s “entirely possible” that inflation cools faster than he expects, which would imply a shallower rate path. “But I think it’s entirely possible that it persists, which would require us to do more,” he added. “I think when you are on a more deliberate rate increase path it does give you a lot more flexibility in terms of the ability to move for longer, or to higher, if you need to.”
By this time next year, Barkin said, he does not expect the Fed to have started any rate cuts.
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In a recent speech given at the virtual U.S. Monetary Policy Forum, Federal Reserve Bank of Richmond President Thomas Barkin expressed his confidence in the economic recovery following the COVID-19 crisis and suggested that he could see the fed funds rate being at a level of 5.5%-5.75% during the foreseeable future.
While the U.S. economy is, according to Barkin, currently “performing quite well,” the Fed is still doing “the work of ensuring the sustainability of the recovery.” He expressed a need for continued vigilance in monitoring the inflation rate and the labor market, “as well as how the vacuum created by the pandemic will be filled in the coming years.”
Barkin was optimistic that businesses will adjust and grow in this new environment and that conditions will remain attractive for a return to normal. However, he noted that “there will likely be some residual dislocations,” such as shifts in rental and labor markets, that the coming months will bring.
On the particularly important issue of the fed funds rate, Barkin stated that he could see the rate staying at a level of 5.5%-5.75% over the next several years, noting that it may be necessary to have the fed funds rate at that level in order to meet the 2% inflation target.
Science Chair of the Federal Reserve Janet Yellen also spoke at the forum, expressing similar views on the economic outlook. She stated that “we can expect that the economy will continue to improve over the longer term and return to pre-crisis levels,” and suggested that the Fed can use its “tools firmly to the fullest extent necessary.”
Given the comments made by two of the most influential Federal Reserve chairs, it is clear that the fed funds rate is likely to remain at a rate of 5.5%-5.75% in the near future. This news should surely bring some assurance to the markets and will provide welcome stability as the country continues to navigate its post-pandemic recovery.
