Market: USA-Barkin (Fed) is not against an interest rate hike if inflation does not fall

by Howard Schneider

WASHINGTON (Reuters) – Richmond Federal Reserve President Thomas Barkin said on Friday he was not averse to further interest rate hikes if upcoming data do not show that falling demand for goods and services translates into a slowdown in inflation.

“I’m still trying to be convinced of the plausibility of the hypothesis that the slowdown in demand will bring inflation relatively quickly towards the 2% target,” he said in a speech to an intervention at an event organized by the NGO Maryland Government Finance Officer Association.

“If future data does not confirm this scenario, I will not hesitate to do more,” he added.

The US central bank (Fed) left key interest rates unchanged at 5%-5.25% on Wednesday, but its new projections show rates could rise by at least half a point more by the end of the month.

Many investors are therefore preparing for a resumption of interest rate increases at the Fed meeting in July.

Without commenting on that deadline, Thomas Barkin stressed that the US bank’s goal remained to bring inflation, which he considers “stubbornly persistent,” to 2%, while its current interest rate is more than twice that goal.

He also admitted that a second rate hike “creates the risk of a bigger downturn” but that pulling back too soon would potentially cause even bigger problems.

“The lesson of the 1970s is clear: If you pull back on inflation too early, it comes back stronger, forcing the Fed to do even more with even more damage,” he explained. “It’s not a risk I want to take,” he added.

According to Thomas Barkin, demand in the US is “weakening”, but “consider it weaker, but not weak yet”, he said.

He added that the question of whether inflation could fall while the labor market remains “robust” and high-income consumers “continue to spend” was unresolved.

Christopher Waller, one of the central bank governors at the Fed, also struck a “hawkish” tone on Friday after the central bank’s announcements.

“Underlying inflation is not coming down as I thought,” he told an economics conference in Norway.

“Inflation just isn’t budging and it’s likely to require further tightening to try to bring it down,” he added.

(Reporting by Howard Schneider; French version by Claude Chendjou, editing by Blandine Hénault)

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