On Tuesday, the President of the Richmond Fed, Thomas Barkinshared his opinion about the stance of the US Federal Reserve Chairman, Jerome Powell, about interest hikes. He said that the chairman’s guidance about increasing the interest rate by 50 or 75 basis points in the next month was ‘reasonable’, given the inflation numbers. However, he did caution that the bank should not be moving too fast because of the consequences to the economy.
The Rate Hike
The National Association for Business Economics had held a webinar that Barkin attended and that is where he shared his opinion. The president said that he was comfortable with what the Fed chairman had had to say about the interest rate hike because it seems quite reasonable. The Fed’s next meeting is scheduled in July and the central bank is expected to deliver a higher-than-expected rate hike.
This is because the Federal Reserve is committed to taming inflation, which is currently three times more than the 2% target of the central bank. But, there are concerns that such aggressive monetary policy tightening could drive the economy into recession.
According to Barkin, the central bank would have to restrict the monetary policy, but he added that the data would provide them with hints about the direction it should take for dealing with the soaring inflation. He said that they do not want to cause any inadvertent damage because of something they don’t anticipate.
Barkin said that judgment is key in balancing everything, so they were just looking towards positive rates, both real and adjusted to inflation.
Support for the Hawkish Approach
A report last week had shown that price pressures were rising more than expected and this had driven the Federal Reserve to increase interest rates by 75 basis points, so borrowing costs were between 1.50% and 1.75%. Forecasts now indicate that the borrowing costs will double in the second half of the year.
This new approach of doing whatever it takes to control inflation has been supported by numerous policymakers, including those who had previously been concerned about inadvertently increasing unemployment. US lawmakers are scrutinizing Powell’s vow of aggressively fighting against the surging prices in hearings that were scheduled for Wednesday and Thursday.
The chairman has stated that the central bank is aware of the risk of economic recession, but they do not have any other choice than to hike up interest rates to bring down prices. As for Barkin, he said that they were hoping that inflationary pressures brought on by the pandemic would ease soon and inflation would start coming down.
However, there is no timeframe for when this might happen and come under the tolerance of the central bank. Half of the run-up in current levels of inflation is because of supply chain issues and this makes it difficult for the Fed to tame inflation because these factors are not within their control. Some critics have said that the Federal Reserve was too slow in hiking up rates this year, due to which they have to be so aggressive now.