After the Federal Reserve announced its policy decision last week — holding interest rates and leaving the door open for rate cuts in 2024 — markets rallied on hopes for easing ahead. However, Richmond Fed President Tom Barkin cautions against getting ahead of the data in an interview with Yahoo Finance Fed Reporter Jennifer Schonberger.
While noting the Fed is “making good progress on inflation,” Barkin says the rate cut predictions are just forecasts. Though not ruling out reductions, Barkin stresses 2024 policy will follow where data leads, resulting in the Fed making “judgments accordingly.”
Barkin believes hitting the Fed’s 2% target requires inflation data to stay “consistent." Though supportive data could prompt cuts, Barkin makes clear that 2024 moves will remain data-determined rather than succumbing to market hopes.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
But others validating investor enthusiasm. San Francisco's Mary Daly saying that cuts could be needed in the year ahead, noting that the Fed should be mindful of over tightening. Joining us now with another perspective from the FOMC is Yahoo Finance's Fed reporter Jennifer Schonberger. Jennifer.
So we're making good progress on inflation. I think that just makes the case to balance the perspective between both sides of our mandate, inflation and employment. And when you do that, the focus naturally shifts to the question of how are you going to address the rate path over the future over the coming months and quarters.
I guess I should say, what I think the chair said in his press conference, which is that the SEP is not forward guidance, it's just a forecast. And so a bunch of individuals put down their forecasts. It had a pretty wide range if you notice it. Based on that forecast, they estimated what would possibly be the number of rate cuts you'd have in the next year. We'll see what happens to the economy over the next year and I'm sure we'll make our judgment accordingly.
JENNIFER SCHONBERGER: How much more confirmation do you need to see from the inflation numbers that prices are sustainably coming back to your 2% target?
TOM BARKIN: Well, we're seeing a good progress, as I said, but the data has jumped around. If you look at the October versus the November inflation numbers, for example, they were wildly different. So I'm looking for consistency.
I'm looking for breadth. Goods have come down, services have not. So consistency around our target and a broad-based disinflationary set of results.
JENNIFER SCHONBERGER: This fall, you felt that the economic data was coming in much stronger than anecdotal evidence that you were hearing on the ground in your district. Now, as we've seen economic data start to cool in the fourth quarter, do you feel the two are coming more in line now? And how does that inform your outlook for the economy next year?
TOM BARKIN: Well, Jennifer, I greatly appreciate you remembering any time that I got something right, so hopefully, you're not going to do the same on the chances where I get something wrong. But I did see, we saw a 5.2% GDP growth in the third quarter. As you know, I'm on the ground constantly in our district and I just wasn't hearing that kind of froth.
We had a 339,000, I think, employment report in September. I wasn't hearing that amount of demand for labor. And I do think the data, as it's come in over the last six to seven weeks, has been much more in line with what I'm seeing, which is everything's normalized.
Demand is normalizing, employment is normalizing, inflation is normalizing. It's not falling off a cliff, which is good news. It's normalizing, but it's definitely not frothy the way that the data seem to be showing in the third quarter.
JENNIFER SCHONBERGER: All right, so given all of that, how does that inform your specific view for the policy path going forward? The median projection for three rate cuts next year, do you fall into that camp?
TOM BARKIN: Well, I'd start by saying we have 3% PCE inflation, we have 3.7% unemployment. And if you had given me those numbers a year ago, I think I would have taken them. I mean, it's a pretty remarkable change over the last year.
Now, we're not yet done with inflation. I'm hopeful the numbers will come down over the coming months. Certainly, the comps will be attractive for the next four months, so I'm expecting inflation to come back down. We'll see what happens to demand.
Like I said, I think it's normalizing, not falling off a cliff. But I'm paying close attention to what we're hearing. And I think you do see some segments of the economy weakening, some of the consumer products, areas where prices have increased. Home improvement, apparel, those are segments that feel weaker. But we'll see what happens when we get into the new year.
And I'm just looking for conviction. I'm looking for a conviction that inflation is coming back to target. I'm looking for conviction that that's the place to focus as we, sort of, balance the dual sides of our mandate.
JENNIFER SCHONBERGER: But do you believe that the Fed does need to cut rates next year as inflation starts to come down and the policy rate becomes more restrictive at that point?
TOM BARKIN: Well, if you're going to assume that inflation comes down nicely, then, of course, we'd respond appropriately. You know, I don't assume what the data is going to do. We'll see what happens.
JENNIFER SCHONBERGER: To be more specific, can we get any more color around your dot?
TOM BARKIN: Well, you know, I don't disclose my particular dot. But I've got a perspective that inflation is a little stubborner than I think the average person in there-- is in there. And I hope I'm wrong on that.
JENNIFER SCHONBERGER: A pitcher pal told me during the press conference that you guys will need to start cutting rates well before inflation hits 2%, otherwise, you will have overshot. As you mentioned, PCE on a core basis, 3.5%. You're seeing some more weakness in some of the internal components, as you mentioned. We'll get another read on PCE this Friday, but how much further does inflation need to fall before you would consider cutting rates?
TOM BARKIN: Well, we'll learn a lot over the next several months. If you remember the front half of last year, we had pretty high inflation rates. In the back half of last year, we had relatively low inflation rates. And so the first half of next year will tell us a lot of that.
If the inflation stays in line with what we've been seeing in the last several months, that would be-- that would be great. If it doesn't, we know we'll know something else. So I think we're going to learn a lot over the first half of this year.
JENNIFER SCHONBERGER: Chair Powell also suggested that the focus is shifting back to both components of the dual mandate, right? You've been so focused on inflation. And yes, of course, full employment is always a focus, but perhaps shifting more back to that as well. So I'm curious how much of the policy prescription is to prevent a recession next year?
TOM BARKIN: Well, so you have to go back to where we were, which-- go back to the beginning of this year, inflation was quite high, unemployment was historically low. It's super that we've been able to get through the year with inflation coming down nicely and employment staying historically at very low levels. In my mind, I'm focused on what we learn about what's happening on employment, what's happening on prices.
If you want to assume that unemployment starts to move up, of course, that would be an area of focus. If you want to assume that inflation doesn't move down, of course, that would be an area of focus. I think we're nicely positioned now with a 3% inflation rate moving down and a 3.7% unemployment rate staying relatively steady. But either one of those things could change.
JENNIFER SCHONBERGER: Markets were aggressively pricing in rate cuts ahead of the FOMC meeting. Now, the projections have come out and they're pricing even more cuts in than you guys are. What do you make of that? And secondly, the fact that financial conditions have loosened so much, if they were to loosen even further, would that cause you to rethink any of the rate cuts?
TOM BARKIN: Well, I haven't learned much over my six years here, but one of the things I've learned is I don't control markets. And so they're going to do what they're going to do. It might take you back again to the beginning of last year.
There has been an ongoing, I'll call it, difference in perspective between the median on the SEP forecast of markets. I think you should look at the record over the last year and see what seems to have paid out. But everyone's got their forecast and we'll see who's right.
JENNIFER SCHONBERGER: All right, who blinks first. Tom, we'll have to leave the conversation there, but thank you so much for your insight. Happy holidays to you. Hope to speak with you in the new year.
TOM BARKIN: You too, Jennifer. Thanks tons.
