(Bloomberg) — Federal Reserve Vice Chair for Supervision Michael Barr said the US central bank needs to see more data indicating inflation is heading back to 2% before it begins lowering interest rates.
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“As Chair Powell indicated in his most recent press conference, my FOMC colleagues and I are confident we are on a path to 2% inflation, but we need to see continued good data before we can begin the process of reducing the federal funds rate,” Barr said Wednesday, referring to the Federal Open Market Committee. “I fully support what he called a careful approach to considering policy normalization given current conditions.”
In prepared remarks to the National Association for Business Economics, Barr also said stronger-than-expected inflation data released Tuesday was a reminder that the path back to the Fed’s inflation target might be “bumpy.”
Fed officials have spent much of the first six weeks of the year pushing back on market expectations for a rate cut at the Fed’s next policy meeting in March. Powell has said the Fed needs more confidence that inflation is on track to return to their target, while other policymakers have warned about several risks that could keep inflation stuck above 2%.
Read More: Lingering Inflation Risks Keep Fed in Wait-and-See Mode
“Given the limited historical experience with the growth and inflation dynamics we currently face, and no modern experience of emerging from a global pandemic, we have yet another reason to proceed carefully, as we have been doing,” Barr said.
Barr also said the healing of supply chain kinks and flows of people back into the workforce helped lower inflation without a strong cost to growth or employment. He also said that recent gains in productivity, or output per hour, have room to run.
“Increased productivity is, in part, likely coming from components that will continue to yield improvements, such as the integration of new technology, new ways of working, and the large increases in new business formation,” he said.
Barr noted how much of the inflation progress has stemmed from deflation in goods prices — a trend he says may have already played out. He said there is room for housing inflation to ebb and that moderating wage growth should help support easing price pressures in the service sector.
That said, Barr emphasized that the Fed is “not targeting subcomponents in the economy.”
“We need overall for the economy to come down to our target,” he said.
Banking Resiliency
Barr also repeated his long-standing view that the US banking sector is sound, and said he sees “no signs of liquidity problems across the system.” That’s despite the disappointing earnings and higher loss provisions at New York Community Bank that led to significant declines in the bank’s stock price, Barr said, without citing the bank by name.
“A single bank missing its revenue expectations and increasing its provisioning does not change the fact that the overall banking system is strong,” said Barr, adding that the Fed is continuing to carefully monitor the sector for risks.
He also said he remains focused on improving bank access to the Fed’s discount window, its traditional backstop lending program, and reiterated that banks should be “fully ready” to borrow from the window in case they need it in a liquidity pinch.
The Fed and other banking regulators are preparing to introduce a plan that would require banks tap the discount window at least once a year to reduce the stigma and ensure lenders are ready for troubled times, Bloomberg News has reported.
Barr also said the Fed’s process of shrinking its balance sheet “has been operating smoothly.” That process will eventually create less abundant reserves in the system, but Barr said the Fed still has a “buffer” before reserves begin to decline in a meaningful way.
He also emphasized it’s “important to closely monitor market conditions well before pressures emerge.”
(Adds additional Barr comments beginning in the eighth paragraph.)
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