Richmond Fed President: Large rate cuts are adjustments, not panic. Inflation issues are not fully resolved yet

According to the financial news app Zhitong Finance, Richmond Fed President Barkin pointed out that after experiencing the highest interest rates and easing of supply chain issues in 20 years, the slowdown in the pace of price increases provides a basis for the Fed to lower interest rates, but the issue of inflation has not been completely resolved. Barkin stated on Wednesday that the significant rate cut by the Fed in September was an adjustment to the current economic situation, not a signal of panic about an economic slowdown.

Barkin, speaking at the 2024 North Carolina Economic Outlook Conference at the University of North Carolina Wilmington in Wilmington, North Carolina, said in his prepared remarks: "The withdrawal of this restrictive policy only alleviates some pressure."

The Federal Open Market Committee (FOMC) of the Fed voted on September 18 to cut the federal funds rate target by half a percentage point to between 4.75% and 5.0%. Barkin has been serving as the Richmond Fed President since 2018 and is a voting member of the FOMC this year.

Barkin said, "I believe our decision in September was a recalibration of a slightly more accommodative stance. After keeping the federal funds rate at a high of 5.3% for over a year, the overall inflation rate is close to target, and the unemployment rate is near its natural level. The current seemingly incongruous number is the federal funds rate, which, given the progress made, no longer needs to be so restrictive."

The Fed's dual mandate is to pursue maximum employment and ensure price stability. After two years of battling inflation, many Fed officials have recently been more concerned about signs of a slowdown in the U.S. labor market. However, Barkin is not yet ready to declare victory in consumer price growth.

He said, "There is still a lot of work to be done on the inflation issue. Although the inflation rate has fallen from its highs, it is still above our 2% target. I do not expect core inflation to decline significantly before 2025, as we are still comparing with low inflation data from the end of last year."

Barkin also analyzed various opposing factors affecting inflation this year and in the coming quarters. Factors suppressing price growth include increased immigration and higher labor force participation rates promoting labor supply, as well as the impact of China's export deflation. On the other hand, lower interest rates may stimulate demand for housing, cars, and other goods typically purchased through financing, thereby pushing up the prices of these goods.

He believes that the U.S. labor market is currently performing well but the trend is not optimistic. Unemployment has risen since last year, and the pace of hiring has slowed down monthly. However, layoffs are still relatively rare, as employers seem more cautious about layoffs after experiencing labor shortages during the pandemic.

Barkin pointed out that the labor market faces dual risks, as lower interest rates may stimulate demand and increase hiring, or negative trends may further exacerbate.

In conclusion, he said, "Although we strive to contribute to the U.S. economy, we will almost certainly not achieve perfection. We operate in an environment full of uncertainty, and the task requires us to make trade-offs, while the main tool - the federal funds rate - has long and uncertain lag effects, with no clear endpoint. Therefore, as we decide on the speed and magnitude of our moves in this rate-cutting cycle, we need to remain vigilant, learning as we go."