Fed stance on rates balances fight against inflation and unknowns of the pandemic, according to Barkin

The rate hikes projected by Fed officials this week represented a “balancing act” between the need to start normalizing monetary policy in the face of high inflation and protection against a rapid credit tightening that could hurt the economy, Richmond Fed President Thomas Barkin said.

“The rate path we announced this week should not drive the economic downturn. We are still far from the rate level that limits the economy”, he declared at an economic forum of the Maryland Bankers Association, in what were his first public comments since the US central bank approved a quarter percentage point rate hike on Wednesday.

“Think of it as an indication that the extraordinary support of the pandemic era is fadingBarkin noted. The fed funds rate has been near zero since March 2020.

The new projections showed that the median of Fed officials’ projections are to raise that rate to 1.9% by the end of this year, still below the 2.4% that policymakers believe would have a neutral impact on economic decisions. .

Amid calls from some officials for faster increases in borrowing costs, Barkin said the Fed could act more quickly, even in half-percentage-point increases, “if we begin to believe that this is necessary to prevent inflation expectations from becoming unanchored”.

But he added that such a shift does not seem to be happening so far, and in the meantime it remains uncertain how quickly some of the pandemic’s lingering problems, from supply chain issues to skewed demand for goods, will be resolved.

Until that is cleared up, Barkin said, it will be difficult to know how quickly the Fed should raise interest rates.

“Setting the right pace for rate increases is a balancing act: we normalize rates to contain inflation, but if we correct them too much, we can negatively impact employment, which is the other part of our dual mandate. And we have some time to get to a neutral position.Barkin said.

“Inflation and employment are still heavily influenced by the pressures of the pandemic era, and more recently the war in Ukraine, and it will take us a while to understand and learn about the dynamics of the post-pandemic economy.”, he added.