By Howard Schneider
RICHMOND, Virginia (Reuters) – Richmond Federal Reserve President Thomas Barkin said he is focused intently on the persistent breadth of inflation across goods and services, and feels slower price increases need to be more widespread before he is comfortable cutting interest rates.
Barkin, who is a voter this year on Fed interest rate policy, described in an interview on Thursday with Reuters how he will be parsing upcoming data as the central bank approaches a critical choice on starting rate cuts. Investors expect that first reduction may come in June, but it could get pushed to later in the year if key reports in the weeks ahead show insufficient progress on taming inflation.
Barkin as a practice does not provide details about his rate projections, but outlined his concerns regarding recent inflation data – particularly his worry that enough firms still retain adequate pricing power to keep topline inflation numbers elevated.
Before the pandemic, he said, about a quarter of goods and services tended to see price increases above 3%. “Now, we have 55% of the basket over three, and 55% of the basket over three it is just hard to reconcile in your mind with the kind of progress you’d want to make” in returning overall inflation to the central bank’s 2% target, Barkin said.
At the end of 2023 “the quality of the numbers at the end of the year were so good…it was easy to talk yourself into a forward lean,” as the Fed shifted its stance to lay the foundation for eventual rate cuts, Barkin said.
Higher-than-expected inflation in January and February, however, tempered optimism he described as “transcendent” at the start of the year.
Fed officials on balance still expect to lower interest rates this year from the current 5.25%-to-5.50% level they’ve been at since July. But like Barkin many policymakers in recent days have expressed concern at the surprising stubbornness of inflation so far this year.
NO TIMEFRAME
While Barkin noted changes in seasonal spending patterns and other factors may have distorted price data to start the year, he also said next week’s release of the Consumer Price Index for March will be important in assessing if the start of the year was simply a “bump” in the return to price stability.
“You get another month that looks like January or February, that takes you in a very different direction of how forward leaning you are,” Barkin said.
“You could continue to imagine a path where…we’re through two bumpy months, and we’re going to go back to the last half of last year. But I think it’s also easy to imagine other paths,” Barkin said. “I am open to rate cuts when the inflation data comes in in a way that…gives me that confidence. I don’t have a timeframe for that.”
But he said his conversations with local businesses did raise questions. Local restaurants and retailers, he said, acknowledged they did not have the pricing power they enjoyed during the reopening from the pandemic, but were also finding ways to segment price hikes for different products targeted to low, middle and higher income consumers.
The “net,” he said, is less inflation than the last two years, but still more than was common before the pandemic.
“I’m still seeing, not everywhere but in more places than I am comfortable with, that sort of thinking about pricing,” Barkin said.
“I do think we’re on the backside of the heavy inflation and I do think the disinflation process is continuing,” he said. “How fast that is, is a question for the data.”
(Reporting by Howard Schneider; Editing by Dan Burns and Diane Craft)