Economy healthy but more work is needed, Barkin says

The U.S. economy is showing signs of health, but bringing down inflation remains necessary, Federal Reserve Bank of Richmond President and CEO Tom Barkin said Thursday during the 2024 Financial Forecast event co-hosted in Richmond by the Virginia Bankers Association and the Virginia Chamber of Commerce.

Economic conditions have improved but haven’t quite settled back to baseline levels, Barkin said, using a mathematical analogy: The economy’s health is nearing the bottom of a parabola but hasn’t quite finished its path back to pre-pandemic levels.

The U.S. unemployment rate was 3.7% in December 2023, according to the Bureau of Labor Statistics. That’s historically low, Barkin said. The inflation rate was 2.6% in November, as measured by the Personal Consumption Expenditures price index, a measure of consumer spending on goods and services among households. The Fed’s target rate is 2%.

“Contrary to most predictions, the economy remains healthy … and that’s despite a number of shocks,” Barkin said.

He sees potential for a soft landing in which inflation is controlled but the economy remains healthy. There are still several “flight risks,” however, in the path down.

The first Barkin sees is that the U.S. economy could “run out of legroom.” Although credit and interest have tightened, they haven’t made the economy soft, and the risk that people and companies could pull back on borrowing remains.

Also, economists can’t predict external shocks to the economic system, like a cyber shutdown, and where those shocks would hit and how hard. Some unforeseen events could bring down inflation but have greater costs to the system

Inflation could also level off above the Federal Reserve’s 2% target. Most drops in inflation have resulted from a reversal of pandemic-era price increases, and a goods deflationary cycle could end, Barkin said, while shelter and service prices remain high.

Additionally, a landing could be delayed, he said. Consumer spending is currently high, but strong demand isn’t a solution to inflation.

As measured by the Labor Department’s consumer-price index, inflation rose in December 2023, with the cost of living up 3.4% from the previous year.

“Overall, we’re still seeing, on a year-term basis, a long-term basis, a moderation in the overall levels of inflation, but there’s still this disconnect between goods and services and shelter,” Barkin told reporters, adding a caveat that “you can’t take too much [meaning] out of any one month.”

During its December 2023 meeting, the Fed’s policy-making Federal Open Market Committee reaffirmed its commitment to raising interest rates if necessary but held its benchmark rate in a 5.25% to 5.5% range.

The FOMC will meet Jan. 30-31 and March 19-20. Barkin is a member of the FOMC for 2024.

As to whether he’d support an interest rate cut in March, Barkin said, “Let’s see where the data comes in. … I don’t prejudge meetings. I definitely don’t prejudge the meeting after the next meeting.”

The U.S. isn’t yet in the clear. Fiscal conditions are ever-evolving, and “you gotta respond to conditions, so buckle up,” Barkin said in his address. “As you know, that’s the proper safety protocol, even if you’re on a plane expecting a soft landing.”