By Howard Schneider
WASHINGTON (Reuters) – The U.S. economy may be primed for several years of above-trend growth as families spend perhaps $2 trillion in excess savings banked during the pandemic, Richmond Federal Reserve President Tom Barkin said, and inflation will head higher for a while.
But Barkin in a Reuters interview late Wednesday would not detail how he expects that strong outlook to influence the Fed’s interest rate or bondbuying policies, saying he would only make and discuss those decisions as data show the economy either meeting or falling short of the Fed’s stated goals.
Investors and journalists may be interested in where he put his “dot” – or estimated target interest rate – in the set of projections issued by Fed officials last week, but Barkin, a voting member of the Federal Open Market Committee this year, said that distracts from the central bank’s intent to let outcomes, not forecasts, drive monetary policy.
“I don’t think it matters. I think what matters is the outcomes we actually get,” Barkin said.
The Fed’s pledge not to raise rates or curb $120 billion in monthly bond purchases until the economy more clearly recovers “is quite explicit and outcome based,” Barkin said. “When we hit the guidance I want to normalize as much as the next guy. But I want to hit the guidance.”
In an economy revved to boom, the Fed’s likely path to “normalization” is a key question for investors analyzing bond and stock prices and households wondering where interest rates are heading as they plan major purchases.
Fed officials have shown a disparate willingness to pin down their views, leaving some investors and economists flummoxed at what they do not know about the central bank’s collective “reaction function.” Essentially, what is its tolerance for higher inflation, its working notion of “maximum employment” and its definition of words like “substantial” that are important to understanding what the Fed might do and, importantly, when?
Barkin said the demand for details set against the calendar – something bond markets clamor for to price securities influenced by Fed interest rate decisions – amount to a “gotcha game” at a time when the central bank wants to be more deliberate about reaching its goals, particularly a healed job market, before changing policy.
For example the Fed has said it would not consider reducing its crisis-era $120 billion in bond purchases until there was “substantial further progress” in restoring the labor market and ensuring inflation hits its 2% target. That is just one of the phrases Fed officials contend are easy to understand but market participants see as imprecise.
Barkin said it was possible that sort of progress could be achieved this year, at least opening the door for the start of a policy discussion.
“I hope so,” he said. With pandemic supply bottlenecks feeding price hikes and post-pandemic demand expected to surge in the service sector, “it is pretty straightforward for me to imagine we are going to make substantial further progress on the pricing front.”
It should not change the “paradigm” of pricing and inflation, he said, but could help coax inflation expectations to the Fed’s 2% target.
On employment, “I would like to hope we have a pretty strong spring and summer.”
But even that is just the start of a conversation. Top Fed officials have emphasized they are in no rush to curb help for the economy until it is clear damage from the pandemic recession is substantially repaired.
As to rate hikes, in the most recent projections 11 officials said they did not think a rate increases would be appropriate until at least 2024; four said it might need to happen next year, and three others joined them to see likely increases in 2023.Barkin would not claim his group, saying events could push him in any number of directions.
“There are various outcomes that I would eagerly embrace as opportunities to begin the process of normalization. There are outcomes I would eagerly embrace the need to wait,” Barkin said. “I don’t have a religious principle” regarding when rates need to increase.
(Reporting by Howard Schneider; Editing by Dan Burns and Chizu Nomiyama)
