It’s a good idea for the Federal Reserve to take its time with interest-rate cuts given all of the uncertainty about where the U.S. economy is headed, Richmond Fed President Tom Barkin said Wednesday, in an interview with MarketWatch.
“In all honesty, my forecast is uncertain. That’s why I think it’s a reasonable idea to be patient,” Barkin said.
Barkin said you can use the economic data to tell credible, but very divergent, stories about where the economy is headed.
“I could tell you a story of a healthy economy and softening inflation, but I could tell you a bunch of other stories,” the Richmond Fed president said.
“I’m more in the world of elevated uncertainty.” He said the forecast he had eight weeks ago has been “confused” by some of the recent data.
Barkin, a voting member of the Fed’s interest-rate committee this year, said inflation has been coming down nicely over the past seven months. At the same time, he said was concerned that the significant decline in goods prices seen over that time might be a “head fake” and might rebound in coming months.
Barkin ducked questions of how many rate cuts he expects this year.
“I don’t have a rate-path focus. I have an economy focus,” Barkin said.
He said he was learning and wanted to have more confidence in which of the multiple economic outcomes “we are headed for.”
If inflation continues on its downward path, and if it starts to broaden out into many categories, “that’s the kind of signal I am looking for” to start normalizing rates, he said.
U.S. stocks
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were higher in early trading on Wednesday while the 10-year Treasury yield
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was slightly lower to 4.10%.
Inflation pressures could linger
Barkin said there may be more inflation pressures in the economy now than you might ordinarily see. For example, wage inflation might stay high. Other factors he mentioned were the tight housing market, deglobalization and the continued efforts of companies to test whether they have pricing power.
Barkin said that the number of companies raising prices has fallen.
“We are on the back end of the cycle” but there is a continued debate about whether to raise prices inside corporate boardrooms, Barkin said.
Businesses are more upbeat
Barkin said his business contacts are more upbeat about the economic outlook.
Last year, business leaders were focused on recession, now they are “firmly in the soft landing camp,” Barkin said.
But this might not be an important signal about the future of the economy because businesses didn’t really change their view of their own prospects.
Over the last few years, businesses were always more upbeat about their own prospects than they were about the national economy. The view of their own businesses hasn’t changed much, he said.
No sense that changes to quantitative tightening are needed quickly
Asked for his views on the timing of making any changes to the Fed’s program for shrinking its balance sheet, commonly known as quantitative tightening, Barkin said he didn’t think changes were imminent.
Federal Reserve Chairman Jerome Powell said last week that the Fed will start “in-depth” talks on when to start to taper its ongoing program to shrink its balance sheet.
The Fed is allowing up to $90 billion of proceeds from maturing Treasurys and mortgage-backed securities to roll off the balance sheet. The goal is to get bank reserves down to an “ample” level from “excessive,” but there is no one estimate of this level.
Bank reserves parked at the Fed are about $4.2 trillion when you add the reverse repo facility, Barkin said. They were at $1.2 trillion in September 2019.
“I don’t think you need to go back to 2019. But $4.2 trillion is a lot bigger than that. That feels like we’re not inches away from having reserves being tight,” he said.
Bank risk from losses on office real estate loans
Barkin said the decline in value of downtown office prices was not a “new problem” and banks understand this is a cyclical business.
“My hope and my expectation is that banks and the workout groups have invested in the activities they need to do to minimize the downside, and have invested the capital they need to get through it,” Barkin said.
The Fed has stress-tested the balance sheets of the biggest banks with negative real-estate scenarios and published the results, he said.
“Is it possible that there are banks out there that have exposures? Of course. Are their real estate assets that are going to go through workout? Of course,” he said.
He said he was highly attentive to the implications of this on the banking system.
“I am certainly hopeful we can get to the other side of this,” he said. The scale of the problem did not approach the financial crisis of 2008, he said.
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