By Howard Schneider
RICHMOND (Reuters) – The U.S. central bank has “time for the clouds to clear” on inflation before starting to cut interest rates, Richmond Fed President Thomas Barkin said on Thursday, comments that endorsed a careful approach to the start of a monetary easing cycle.
Inflation data at the start of this year “has been a little less encouraging,” Barkin told the Home Building Association of Richmond, and while that may be a result of weather-related or seasonal issues “it does raise the question of whether we are seeing a real shift in the economic outlook, or merely a bump along the way.”
“I think it is smart for the Fed to take our time,” said Barkin, who is a voting member of the Fed’s policy-setting committee this year. “No one wants inflation to reemerge. And given a strong labor market, we have time for the clouds to clear before beginning the process of toggling rates down.”
“I’m still looking for the slowing in reported inflation to sustain and broaden,” he said.
The Fed held its benchmark overnight interest rate steady in the 5.25%-5.50% range last month, with most officials anticipating three quarter-percentage-point rate cuts this year. Markets expect an initial reduction to happen in June.
Barkin did not say when he thought rates might fall or how quickly. Fed officials looking at the same data, he said, could “come away with different conclusions” about where things stand.
Observers optimistic about a “soft landing” in which inflation slows without triggering a painful recession might note the economy’s continued strength and the sharp decline in inflation since last year, Barkin noted. Pessimists, on the other hand, might worry that the economy could slow faster than expected, or that inflation will prove persistent.
Barkin said overall he remained “optimistic that keeping rates somewhat restrictive can bring inflation back to target,” and that if the economy does slow it will not be as painful as it has in the past as companies fight to hold onto workers.
Many firms, he said, have already prepared.
“If a slowdown does come, the economy should find itself less vulnerable,” he said.
(Reporting by Howard Schneider; Editing by Paul Simao)