Hike rates

Fed’s best path is to quickly raise rates to neutral, says Barkin

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The Federal Reserve should raise interest rates to the neutral range as quickly as possible and may go beyond that if price pressures persist, Richmond Fed Chairman Thomas Barkin said.

“The best short-term path for us is to move quickly into the neutral range and then test whether pandemic-era inflationary pressures are easing and how persistent inflation has become,” Barkin said Tuesday, referring to the level of rates accelerating neither. nor slow down the economy. “If necessary, we can go further,” he said at an event hosted by New York University Money Marketeers.

The Fed’s latest quarterly projection released in March shows interest rates will rise to 1.9% by the end of 2022 and 2.8% by the end of next year, according to the median estimate, while the neutral rate is estimated at around 2.4%.

Policymakers raised interest rates by a quarter point last month to a target range of 0.25% to 0.5% and signaled they plan to keep raising them all year. , while finalizing plans to reduce their massive balance sheet next month. Central bankers have said this cycle of tightening will be faster than in previous economic recoveries – including raising rates in larger increments of 50 basis points if needed – to curb soaring inflation.

U.S. consumer prices rose 8.5% in March from a year earlier, marking the biggest increase since 1981. War in Ukraine has pushed up food and energy costs , pushing headline inflation away from the Fed’s target.

The Fed’s pledge to tackle the highest inflation in four decades doesn’t “necessarily require a hard landing,” said Barkin, who isn’t voting on the policy this year. “In fact, it could help avoid one by convincing individuals and businesses that the Fed is committed to our target, thereby cementing inflation expectations.”

Minutes from the March 15-16 Fed meeting showed ‘many’ officials would have preferred a half-point move but wanted to wait and see how Russia’s invasion of Ukraine would affect the outlook. economic. Minutes showed many saying one or more half-point rate hikes “may be appropriate” if inflationary pressures remain high.

Barkin also said the Fed needs to be “full clear that a growing economy requires stable prices and that we will remain committed to weathering bursts of inflation.”

(Updates with neutral rate median estimate in third paragraph.)

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