BALTIMORE (Reuters) – The rate increases projected by Federal Reserve officials this week represented a “balancing act” between the need to begin normalizing monetary policy in the face of high inflation, while guarding against a fast tightening of credit that could damage the economy, Richmond Fed President Thomas Barkin said on Friday.
“The rate path we announced this week shouldn’t drive economic decline. We are still far from the level of rates that constrains the economy,” Barkin told a Maryland Bankers Association economic forum in what were his first public remarks since the U.S. central bank on Wednesday approved a quarter-percentage-point increase in the target federal funds rate.
“Think of it as an indication that the extraordinary support of the pandemic era is unwinding,” Barkin said. The federal funds rate has been near zero since March of 2020.
New projections showed Fed officials at the median envision raising that rate to 1.9% by the end of this year, still below the roughly 2.4% level that policymakers feel would have a neutral impact on economic decisions.
Amid calls by some officials for faster hikes in borrowing costs, Barkin said the Fed could move more quickly, including in half-percentage-point increments, “if we start to believe that is necessary to prevent inflation expectations from unanchoring.”
But he added that such a shift didn’t seem to be happening so far, and in the meantime it remained uncertain how quickly some of the lingering problems from the pandemic – from supply chain troubles to the skewed demand for goods – will be resolved. Until that becomes clearer, Barkin said, it will be hard to know just how fast 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 over-correct, 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 being heavily influenced by pandemic-era supply and participation pressures – and more recently, the war on Ukraine – and it will take a while for us to understand and meet the dynamics of the post-pandemic economy,” he added.
Source: Economy - investing.com
