Fed’s Barkin: Current policy is in a good place to respond to ongoing shocks
- Current policy is in a good place to respond to ongoing shocks
- Whether the Fed needs to hike rates depends on how businesses, consumers react to developing conditions
- Consumers are “not happy" but continue to spend; businesses are so far managing productivity improvements through attrition and not layoffs
- The policy of looking through supply shocks has worked well in the past, but it’s easy to see more challenging conditions and more frequent shocks in the future
- So far long-term inflation expectations appear to remain contained
Fed’s Barkin is not a voter this year and he’s been keeping a neutral stance for a while, so these comments are in line with his position. By saying that the current policy is well-positioned to respond to ongoing economic shocks, he’s implying a higher for longer policy stance without the need of rate hikes.
He’s also adding that rate hikes will depend entirely on how businesses and consumers react to evolving economic conditions. So, he’s taking a heavily data-dependent approach.
Despite consumers frustration with higher prices, personal consumption has not slowed. Consumers continue to spend and this resilience is tightly bound to a stable labor market. Businesses are so far managing productivity improvements through attrition and not layoffs.
Barking said that the policy of looking through supply shocks has worked well in the past, but the problem is with the part where he said that “it’s easy to see more challenging conditions and more frequent shocks in the future". Since the Fed has been missing its target for 5 years now, people might start to expect more frequent shocks in the future and persistently higher inflation.
The risk that inflation expectations de-anchor from the 2% target is high now. The problem of looking at long-term market-based inflation expectation is that they might signal a problem when it’s already too late, which is what happened in 2021-2022 and eventually required an aggressive tightening.
Let’s not forget that the 10 year breakeven was around 2.9% in March 2022 when US headline CPI Y/Y was at 8.5% and Core CPI Y/Y was at 6.5%.
This article was written by Giuseppe Dellamotta at investinglive.com.