Barkin: Still a waiting game for interest rates’ effect on inflation

The U.S. economy has yet to feel the effects of current interest rates, but it eventually will, Federal Reserve Bank of Richmond President and CEO Tom Barkin predicted Thursday during an event held by the Risk Management Association’s Richmond chapter in the city’s East End.

“I’m optimistic that we’ve gotten rates at a restrictive level today, and that’ll take the edge off demand over time and bring inflation back to target,” said Barkin, who is a 2024 member of the Fed’s policy-making Federal Open Market Committee.

For now, although the economy is moving back to a better balance, Barkin said, the “data rollercoaster” from late 2023 to the most recent numbers shows that inflation isn’t yet stable. The Fed’s target inflation rate is 2%, measuring by the annual change in the Personal Consumption Expenditures price index, which is a U.S. Commerce Department measure of consumer spending on goods and services among households.

The economy finished 2023 relatively healthy, data showed.

“For the final seven months of the year, core PCE inflation on an annualized basis came in just under our 2% target,” Barkin said at the event, held at Triple Crossing Beer’s Fulton neighborhood location. Core PCE excludes food and energy costs. In December 2023, the core PCE was up 2.9% on a yearly basis. Headline inflation, which includes food and energy costs, stood at 2.6% annually.

In the fourth quarter of 2023, the country’s economic growth, as measured by changes in its gross domestic product, was 3.4%. The average unemployment rate for the year was 3.6%.

In early 2024, though, the data pivoted. For the first quarter of 2024, the PCE rose at a 3.4% annualized pace, and the core PCE prices rose at a 3.7% rate.

GDP increased at a 1.6% annualized rate in the first quarter, the U.S. Department of Commerce said in its “advance” estimate on April 25, although in its second estimate released May 30, the department revised the growth rate to 1.3%. The labor market remained strong, though, and the unemployment rate remained below 4%.

“We’ve been at or below 4% unemployment every month for the last 30 months. That’s the first time that’s happened since the late ’60s,” Barkin said.

In another data pivot, the May price index report showed some progress on inflation. The year-over-year increase in the Consumer Price Index — a Labor Department measure of the average change over time in prices that urban consumers paid for a basket of goods and services — at the end of April was 3.4%, but at the end of May, the index rose only 3.3%. The CPI did not show a monthly increase from April to May. The core CPI over the last 12 months rose 3.4%.

In terms of interest rates’ effects, “enough people and enough businesses either paid down their debt or refinanced their debt, that the aggregate interest burden has not actually gotten back to the levels you would expect, given the rapid increase in interest rates. And that suggests to me that the full impact of higher rates is still to come,” Barkin said.

People and companies were able to pay down or refinance debt because of low rates in 2021 and stimulus money, both for consumers and in Paycheck Protection Program loans, Barkin told reporters. The aggregate interest burden will change as people buy houses at higher rates.

Barkin said he does have some concerns about consumer demand supporting price increases: “On inflation, I do hear price-setters increasingly convinced that the era of significant pricing power is behind them, but I do think that the experience of the last couple years has just given people more urge to use price as a lever. … [Businesses] are simply more confident using pricing as a lever, and I anticipate that will be the case until customers or competitors send a strong message that they have no chance.”

In its June 12 meeting, the Fed’s Federal Open Market Committee voted to hold its benchmark interest rate at 5.25% to 5.5% and signaled it expected to make only one cut this year. The FOMC next meets July 30-31.

“My personal view is about, let’s get more conviction before moving — whether that move be a ‘one-time and we’ll see’ cut or multiple cuts — I feel the need for clarity [on inflation] before any of those situations,” Barkin told reporters.