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Fed’s Barkin says interest rates should be moved rapidly to neutral -Breaking


© Reuters. FILEPHOTO: President Thomas Barkin of Federal Reserve Bank of Richmond takes a break during the Dallas Fed Technology Conference in Dallas, Texas (U.S.A.), May 23, 2019. REUTERS/Ann Saphir

(Reuters) – U.S. Federal Reserve President Thomas Barkin stated Tuesday that the Federal Reserve must quickly increase interest rates to a point where borrowing costs won’t be stimulating the economy and should also raise them further if persistent high inflation continues.

“How far we will need to raise rates, in fact, won’t be clear until we get closer to our destination, but rest assured we will do what we must to address this recent bout of above-target inflation,” Barkin said in remarks prepared for delivery to the Money Marketeers in New York. The best way to get to neutral quickly is to test if pandemic-era inflation pressures have easing and how persistent it has become. This will be the most effective short-term strategy. “If necessary, we may be able to move even further.”

A government report on Tuesday showed that March’s consumer price inflation rose 8.5% from one year prior. It was the fastest rate since late 1981. The increase occurred because Russia’s war with Ukraine drove gasoline and food prices up, while lockdowns in China were threatening to worsen inflationary supply chains disruptions.

To combat what the Fed considers to be largely pandemic-induced, it raised its interest rate from close to zero last month. To deal with inflation more decisively, policymakers indicated that they might accelerate rate increases and reduce Fed’s imbalance — which is bloated from its purchase of bonds.

Barkin’s comments show that he supports this approach and more.

Fed policymakers believe that the inflation pressures they have maintained for many decades will be reaffirmed once there is no more pandemic.

Barkin stated Tuesday that he wasn’t so certain of this narrative. He noted that prices could stay higher if supply chains are reconstructed to resist disruptions. If the government has to invest more in order to benefit an aging population and if labor supply is limited due to slowing growth, then price pressures may continue to rise.

Barkin stated that if high levels of inflation become more frequent in the future, it could mean Barkin tightening monetary policy for longer periods than was the case recently to maintain inflation expectations.

This could cause communication problems as Fed policymakers may explain why maintaining stable prices is necessary in order to balance costs with benefits for employment.