The president of the Federal Reserve Bank of Richmond has expressed support for a slight reduction in the central bank’s key interest rate but is not yet inclined to cease economic restraint entirely.
In an interview with The Associated Press on Thursday, Tom Barkin noted the economy’s “impressive strength,” citing strong recent reports on retail sales, unemployment claims, and 3% growth in the April-June quarter. Barkin stated that with inflation and unemployment nearing normal levels, it is reasonable to reduce the level of restraint somewhat. However, he remains cautious and is not ready to fully relax the measures until inflation is more firmly under control. The neutral benchmark rate is estimated at 3% to 3.5%, significantly lower than the current rate of 4.8%.
Barkin’s stance contrasts with some other Federal Reserve policymakers who advocate for more urgent rate cuts. Fed Governor Adriana Kugler supported a larger-than-usual half-point rate reduction last week and indicated that she would endorse additional cuts if inflation continues to fall. Similarly, Austan Goolsbee, president of the Chicago Fed, anticipates “many more rate cuts over the next year.”
Barkin was among the 11 Fed policymakers who voted for the recent rate cut, while Governor Michelle Bowman preferred a smaller quarter-point reduction. Barkin explained that his support was influenced by the relatively modest path of rate reductions projected by the Fed for the remainder of this year and through 2025, which indicated just two quarter-point cuts later this year and four next year.
These projections, which Barkin described as “very measured,” also presented a “reasonably positive view” of the economy and helped to counter any perception that the Fed’s recent sharp rate cut reflected panic over the state of the economy.
While Barkin anticipates that inflation will continue to decrease in the short term, he acknowledged potential risks next year. Factors such as conflict in the Middle East potentially driving up oil prices and lower interest rates accelerating home and car purchases could lead to price increases if supply does not keep pace.
Barkin noted that the current inflation rate, although reduced from a peak of 7% in 2022 to approximately 2.2% in August, remains above target. Therefore, he emphasized the need for continued vigilance.
Barkin envisions a two-phase approach to reducing borrowing costs, beginning with a “recalibration” due to current rates being higher than necessary given the recent decline in inflation. A full “normalization” to neutral levels would only be considered if inflation continues to abate steadily over the next year.
Additionally, Barkin’s discussions with businesses in the Richmond Fed’s district—which includes Maryland, Virginia, North Carolina, South Carolina, the District of Columbia, and most of West Virginia—have been reassuring. Despite a clear slowdown in hiring, the companies consulted are not planning layoffs. Barkin noted that businesses remain healthy and, having experienced labor shortages during the pandemic, are reluctant to face similar issues again.