Fed rate path balances fight against inflation and pandemic unknowns, says Barkin

BALTIMORE, March 18 (Reuters) – The rate hikes projected by Federal Reserve officials this week represented a “balancing act” between the need to start normalizing monetary policy in the face of high inflation, while guarding against against a rapid credit crunch that could hurt the economy, Richmond Fed President Thomas Barkin said Friday.

“The rate trajectory we announced this week should not lead to economic decline. We are still far from the level of rates that limits the economy,” Barkin said at a Maryland Bankers Association economic forum during his first public remarks from the US central bank. on Wednesday approved a quarter-percentage-point increase in the target federal funds rate.

“Take this as an indication that the extraordinary pandemic-era support is unfolding,” Barkin said. The federal funds rate has been close to zero since March 2020.

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New projections showed that Fed officials at the median plan to raise that rate to 1.9% by the end of this year, still below the level of around 2.4% that policymakers say , would have a neutral impact on economic decisions.

Amid calls from some officials for faster increases in borrowing costs, Barkin said the Fed could act more quickly, including in half-percentage-point increments, “if we start to believe that this is necessary to prevent inflation expectations from becoming unanchored”.

But he added that such a change did not seem to be happening so far and that in the meantime he remained uncertain how quickly some of the lingering problems of the pandemic – from supply chain problems to skewed demand for goods – would be resolved. Until that becomes clearer, Barkin said, it will be difficult to know how quickly the Fed should raise interest rates.

“Setting the right pace for rate increases is a balancing act – we normalize rates to contain inflation, but if we correct too much we can have a negative impact on employment, which is the other part of our dual mandate. And we have time to get to a neutral stance,” Barkin said.

“Inflation and employment are still strongly influenced by supply and participation pressures in the era of the pandemic – and more recently, the war against Ukraine – and it will take us some time to understand and respond to the dynamics of the post-pandemic economy,” he said. added.

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Reporting by Howard Schneider Editing by Paul Simao

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