The Fed hawks are on stage! They have time to assess the economy and are not yet ready to cut interest rates

In 2024, FOMC voter and Richmond Fed President Barkin said on Thursday that the Federal Reserve has time to assess whether the U.S. economy is normalizing or weakening, the latter of which would require officials to take more forceful action.

Barkin expressed optimism about inflation data in the coming months and believed that the recent broadening of anti-inflation measures would continue.

"In a healthy economy, you have some time to judge whether this is an economy that is gradually entering a state of normalization, which will allow you to adjust interest rates in a stable and cautious manner, or whether the current economy really requires your full commitment," Barkin said during a webinar hosted by the National Association for Business Economics.

Fed officials are increasingly focusing on the labor market as inflation is now close to the 2% target, but Barkin emphasized that he does not believe massive layoffs are imminent.

Policymakers voted at last week's FOMC meeting to keep rates unchanged at their highest level in over 20 years. Following the July employment report showing a significant slowdown in hiring, with the unemployment rate rising to 4.3%, near a three-year high, and growing for the fourth consecutive month, financial markets suddenly reassessed the Fed's stance on interest rate policy.

According to the futures market, investors are now expecting a cut of about one percentage point in rates this year. Some economists now expect the Fed to take a significant 50 basis point rate cut at the next meeting in September.

The Fed's preferred price gauge, the PCE, rose 2.5% year-on-year in June. Another closely watched inflation measure, the Consumer Price Index (CPI), will be released next week.

"You have to acknowledge that the data over the past few months has been overall very good, and also looks good from a breadth perspective. All factors of inflation seem to be easing," Barkin said. "I am relatively optimistic and hope this situation will continue."

Kansas City Fed President Schmid also spoke on the same day, stating that despite inflation exceeding the target, the labor market remains healthy, but he is not yet ready to support a rate cut.

Schmid said the recent decline in inflation is "encouraging," and further downward pressure on prices would increase his confidence in inflation heading towards the 2% target, thereby supporting a rate cut. "We are close, but not quite there yet," Schmid said. He did not indicate when the Fed should cut rates: "The path of policy will be determined by data and the strength of the economy."

"Overall, the labor market still looks healthy. The July nonfarm payroll report released last week raised doubts for many about this resilience. But it is important to note that many other indicators show continued strength," Schmid said. Business contacts in the Kansas City Fed district "generally exhibit optimism and resilience," he added Schmidt is one of the more hawkish officials at the Federal Reserve. He stated that two years ago, when inflation surged to its highest level in decades, a cautious assessment of progress is needed. "We should look at the worst-case scenario in the data, not the best-case scenario."