If the economy were to undergo an annual physical, Richmond Federal Reserve President Tom Barkin would rate it “reasonably healthy.”
That’s because, undeterred by the highest interest rates in 23 years, consumers are still spending and jobs are plentiful, though the pace of both hiring and spending has shown signs of slowing after a multi-year post-Covid boom. Inflation, meanwhile, is inching closer to the Fed’s 2% target — but it could take years before that goal is achieved.
In a Friday interview with CNN, Barkin said he observed this firsthand in recent visits with business owners in a wide range of industries including aquaculture, farming, fitness, construction and autos.
The positive economic developments as well as Fed officials’ forecasts for at least three rate cuts this year had investors eying a March pivot. But ahead of their first monetary policy meeting of the year at the end of this month, several Fed officials have joined forces to try to convince investors that March cuts are a longshot.
Fed Governor Christopher Waller irked financial markets last week when he said “I see no reason to move as quickly or cut as rapidly as in the past.” Earlier this month, Cleveland Fed President Loretta Mester, who will be voting at meetings through her June retirement, outright said March is “probably too early” for cuts. As a result, investors lowered their expectations for a March cut to around 40% from over 70% two weeks prior.
Meanwhile, Barkin — who will also be voting on Fed policy decisions at meetings this year — isn’t ruling March out entirely.
“You have to focus on what’s happening on demand and whether that’s either helping your efforts to bring inflation in line or working against you, and then I think you make the call when you get to the meeting,” Barkin said.
“I’d like to see inflation convincingly headed back to our target. I don’t have any particular objection to normalizing rates when it’s the right time,” he said. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures price index, rose 2.6% in November from a year ago. But, compared to the prior six months, prices were up 1.9%.
December PCE inflation data is due on Friday. Economists polled by FactSet expect year-over-year inflation to remain flat at 2.6%.
For Barkin, “the breadth of inflation settling” and “the consistency of inflation settling” matter in his evaluation of whether the inflation rate is approaching the Fed’s target.
He’s keeping a close eye on the behaviors of so-called “price setters,” or companies with a significant enough amount of perceived market power to raise prices to a certain extent for goods or services without having to worry about losing customers.
“I am hearing encouraging messages on the inflation side from there. We’ll see how long they last,” Barkin told CNN.
Unlike many Fed officials, Barkin does not have a PhD in economics but has an MBA and a law degree. He joined the Richmond Fed in 2018 having worked at McKinsey for 30 years in a variety of roles including chief financial officer and chief risk officer.
His experience at McKinsey gives him a unique edge at Fed meetings, he said. “There’s real value to be added in the room by somebody who understands how businesses are making decisions day to day.”
If Fed officials hold out too long before they cut interest rates and inflation continues to cool, the current level of interest rates could be overly restrictive and drag on the economy. At the same time, if officials cut rates too soon, they could inadvertently invite more inflation to the economy.
“We’re in a good place for thinking about that,” New York Fed President John Williams, a top adviser to Fed Chair Jerome Powell, said in response to a question posed by CNN earlier this month. But Williams was unwilling to commit to imminent rate cuts, saying the central bank needs to maintain a “restrictive stance of policy for some time.”
Barkin is keenly aware of the possibility that the Fed has already missed the boat on a soft landing — or, getting inflation back to target without inducing a recession. However, the consensus among economists is that a soft landing is well within reach.
That said, Barkin cautioned, “There’s always the risk that we oversteer.”
“It’s easy to imagine the net impact of all this tightening will eventually hit the economy harder than it has to date,” Barkin said on January 3 in remarks he delivered to the Raleigh Chamber of Commerce. That’s because the full extent of the Fed’s most recent 11 hikes remains to be seen due to policy lags.
“As an example, I saw data suggesting that corporate interest payments as a percent of revenue and household interest payments as a percent of disposable personal income have both now only gotten back to 2019 levels,” Barkin said in his remarks.
The Fed’s next two-day monetary policy meeting kicks off on January 30. Officials are widely expected to hold rates steady. Investors will be paying close attention to any hints of the timing of rate cuts in the central bank’s latest statement and Fed Chair Jerome Powell’s press conference.