Fed's Barkin sees soft landing, but warns cautious approach still needed

The US economy is probably heading for a soft landing but geopolitical tensions meant that a cautious approach was still needed by policymakers, a central bank official said on Wednesday.

Richmond Federal Reserve President Thomas Barkin said interest rate hikes remain “on the table” even though officials at their most recent meeting in December indicated that this round of policy tightening was probably over as inflation continued to fall.

“We’re making real progress,” Barkin, a voting member this year on the rate-setting Federal Open Market Committee, said in prepared remarks for a speech.

“Now, everyone is talking about the potential for a soft landing, where inflation completes its journey back to normal levels while the economy stays healthy. And you can see the case for that.”

Inflation by the Fed’s preferred measure of personal consumption expenditures prices rose 2.6% in November from a year ago, and was up 3.2% excluding food and energy.

Making comparisons with a pilot landing an airplane Barkin said the economy could “run out of fuel” and growth could reverse; “unexpected turbulence” such as geopolitical events or the banking shock that hit in March 2023; approach "the wrong airport,” where inflation holds above the Fed’s 2% target; or make a “delayed landing”, where demand stayed elevated and boosted inflation.

“The airport is on the horizon. But landing a plane isn’t easy, especially when the outlook is foggy, and headwinds and tailwinds can affect your course,” Barkin said. “It’s easy to oversteer and do too much or understeer and do too little.”

Policy committee members have pencilled in three quarter-percentage point rate cuts in 2024 after 11 hikes in a row.

“Longer-term rates have dropped recently, which could stimulate demand in interest-sensitive sectors like housing,” he said. “While you might think this would be a first-class problem, strong demand isn’t the solution to above-target inflation. That’s why the potential for additional rate hikes remains on the table.”

Reporting by Frank Prenesti for Sharecast.com