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Fed“s more gradual rate hike path should limit economic harm, Barkin says

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Federal Reserve Bank of Richmond President Thomas Barkin poses during a break at a Dallas Fed conference on technology in Dallas, Texas, U.S., May 23, 2019. REUTERS/Ann Saphir/File Photo

The Federal Reserve’s move to smaller interest rate hike increments will help limit damage to the economy as the U.S. central bank works to bring high inflation down, Richmond Fed President Thomas Barkin said on Friday.

“If you think supply chain improvements and our actions to date are enough to bring inflation down quickly, then our more gradual rate path should limit the harm,” Barkin said in prepared remarks for an event in Durham, North Carolina.

The economy maintained a strong pace of job growth in December, government data showed earlier on Friday, with the unemployment rate falling to 3.5%, but a moderation in wage gains heartened investors as the Fed aims to quell the pace of price increases without sparking mass layoffs.

The U.S. central bank, which rapidly raised interest rates in 2022 to combat the highest inflation since the 1980s, is eyeing a stopping point in its current tightening cycle in the spring of this year. Its main policy rate currently sits in a target range of 4.25% to 4.50% and Fed policymakers forecast a peak at around 5.1%.

Minutes of the Fed’s last policy meeting in December showed its rate-setters still focused on controlling the pace of price increases amid worries of any “misperception” in financial markets that their resolve to fight inflation was in any way faltering.

Barkin did not provide his individual forecast of where he thinks rates will peak nor his policy preference for the Fed’s Jan. 31-Feb. 1 meeting.

But he reiterated the Fed must remain resolute in its commitment to bringing down inflation even as it is prudent to act more cautiously so as not to quash demand too aggressively as well as allow time for the central bank’s actions to permeate through the economy. Inflation, as measured by the Fed’s preferred gauge, is running at nearly three times the central bank’s 2% target.

“It makes sense to steer more deliberately,” Barkin said. “Once demand weakens, studies estimate it can take another six to 12 months before those pullbacks quiet the rate of inflation.”

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