Richmond Federal Reserve President Tom Barkin, a voting member of next year's interest rates setting committee, said on Tuesday that consistent data trends are needed before considering rate cuts.
The market anticipates a potential rate cut as soon as March 2024 after Fed Chair Jerome Powell made remarks hinting at potential discussions on reducing borrowing costs at last week's FOMC meeting. The Fed forecasted a potential 75 basis point cut next year from the current 5.25-5.5 percent rate.
In January, core inflation stood at 5.6 percent. At the time, the Fed had recently concluded significant tightening actions, including a 50-basis-point increase in December 2022 and 75-basis-point hikes during the summer and fall of the same year.
The Fed then increased rates by a 0.25 percentage point on February 1, followed by an additional 0.25 in March and May. Despite concerns over a regional banking crisis impacting further hikes, the Fed continued hiking its rates until it paused the rate hikes at 5.25-5.5 percent in July.
The most recent inflation reading based on the Fed's preferred gauge (Personal Consumption Expenditures (PCE) index minus volatile food and energy prices) was 3.5 percent in October - a drop from 3.7 percent in September and 4.3 percent in June. The November reading for this gauge is anticipated to reach 3.4 percent. Barkin mentioned that the upcoming November release of the PCE might mark six months of figures around the Fed's 2 percent target.
Barkin pointed out the inconsistencies between October and November data. He now wants to see the services aspect of inflation mirror the downward trajectory observed in goods like washing machines and cars.
"I think we're nicely positioned now with a 3 percent inflation rate moving down, and a 3.7 percent unemployment rate staying relatively steady," Barkin told Yahoo Finance Live in an exclusive interview.
Following this data, he aims to gauge the strength of demand within the economy. Initially, Barkin assumed the official economic data was stronger than anecdotal reports from his district this fall. However, now he believes the economy is returning to a more regular pace after the rapid growth of over 5 percent witnessed in the third quarter.
Other Fed officials' statement
Barkin is the latest Fed official to make cautious remarks about future rate directions amid a market rally driven by investor expectations of early cuts.
New York Fed President John Williams cautioned against discussing a March rate cut, deeming it "premature." Meanwhile, Cleveland Fed President Loretta Mester told the Financial Times that the market was "a little bit ahead" in their predictions.
Apart from the unanimous statements, rate-cut projections varied within the committee. As per the recent "dot plot" released by the Fed, two members anticipate maintaining rates at current levels, five anticipate two cuts next year, six foresee three cuts and four anticipate four cuts next year.
Adding to Barkin's statement, Chicago Fed President Austan Goolsbee said on Tuesday that substantial progress in curbing inflation will be the pivotal factor influencing any decision to cut rates next year.
"If inflation continues to come down to target, then the Fed can reconsider how restrictive it wants to be," Goolsbee said in an interview on Fox News.
According to Goolsbee, the stock market, buoyed by Jerome Powell's suggestion of potential rate cuts, became overly optimistic and made premature decisions. The "euphoria" surrounding Fed interest-rate cuts might have led to market anticipation, but he clarified that the U.S. central bank won't yield to market pressures.
Goolsbee also clarified that the decision to cut rates isn't influenced by politics, countering the suggestion that the Fed would adjust rates to benefit President Joe Biden's reelection chances.