Richmond Federal Reserve Bank president Thomas Barkin stated on Wednesday that the Fed is making real progress as the inflation in the U.S. has fallen and the economy has remained healthy contrary to most predictions. He also noted that the six-month core inflation is now just below the Fed's target at 1.9%, while the unemployment rate remains at a historically low 3.7% and 2023 GDP growth is estimated to be around 2.5%.
The official added now we can see the case for a soft landing, where inflation completes its journey back to normal levels while the economy stays healthy. However, he warned that he sees four big risks for that, including the delayed impact of high rates on credit conditions, unexpected outside shocks (geopolitical events, a cyber shutdown, unanticipated spillovers from troubled sectors or banks pulling back in force), shelter and services inflation getting stuck, and strong demand. "So, a soft landing is increasingly conceivable but in no way inevitable," Barkin stressed. In addition, the Fed policymaker also noted the fact the U.S. economy continues to defy expectations explains why the potential for additional rate hikes remains on the table.
Barkin also noted that the markets paid a lot of attention to the Fed's December meeting, which revealed that most of the rate-setters forecasted rate normalization to begin sometime this year but the range of estimates was pretty wide - from no cuts to as many as six. The official cautioned markets to focus less on the rate path and more on whether inflation is continuing its descent and the broader economy is continuing to fly smoothly. "Conviction on both questions will determine the pace and timing of any changes in rates," he said.