Richmond Federal Reserve Bank President Tom Barkin said Monday that inflation has come down nicely, but some businesses are planning to keep raising prices — and that means the Fed should hold rates at relatively high levels for a long time.
“I see inflation being stubborn, and that makes the case for me being higher for longer,” Barkin said in an interview with Fox Business, referring to the level of interest rates.
Financial markets now expect that the Fed will quickly cut rates by 100 basis points next year beginning in May.
Asked why the market was not believing the Fed, Barkin said the market and the Fed have often been at odds in the post-pandemic economy. It comes down to different forecasts for the economy, he said.
Markets can be more optimistic about inflation or more pessimistic about the outlook for growth. That leads to a different path for interest rates, he said.
Barkin, who is a voting member of the Fed’s interest-rate committee this year, declined to elaborate on where he sees interest rates going in coming months.
“I don’t think this is a big time for forward guidance on rates,” Barkin said.
Future moves of inflation are the key data points to watch, he added. “I’m reacting to inflation,” he said. “If inflation ticks up, that makes the case to do more. And if inflation comes naturally, then it doesn’t.”
Barkin said many business executives tell him they are still pushing up prices in increments “higher than pre-COVID levels.”
“I am still looking to convinced that price setters have gotten back to where they were three or four years ago, which was an understanding that above-normal price increases just weren’t a management lever,” he said.
Barkin wouldn’t define what he meant by the level of interest rates being “higher for longer.” “It depends how the economy evolves,” he said.
Asked about the outlook for growth, Barkin said he expected real GDP growth to normalize after a robust 4.9% growth rate in the third quarter.