With the US economy maintaining strength but inflationary pressures still lingering, Fed officials, including Barkin, are sending a cautious message about keeping interest rates high. This approach aims to control inflation but is also causing the market to hesitate about the outlook for monetary policy this year.
Fed's Perspective on Inflation Risk
Speaking at the Maryland Bankers Association event, Barkin—one of the Fed officials—emphasized the possibility that inflation could accelerate. He pointed out that, with the US economy remaining strong and wage pressures rising, this risk is becoming increasingly evident.
“I’m part of the group at the Fed that wants to keep rates high longer to keep inflation in check,” Barkin said, adding that this view is not universally shared within the Fed.
Keep Rates High or Lower Them?
At its recent meeting, the Fed signaled a slowdown in the pace of interest rate adjustments. Specifically, officials forecast a total reduction of 50 basis points (0.5%) this year. However, Barkin warned that any rate cut would depend on:
Confidence that inflation will return to the 2% target.
Signs of significant weakening in demand within the US economy.
Currently, the US reference interest rate fluctuates between 4.25% and 4.5%. Many investors expect the Fed to keep interest rates unchanged at its upcoming meeting on January 28-29, rather than cutting them further.
Pressure or Opportunity for the Market?
The pressure to lower interest rates is coming from several sides, including the new administration's commitment to cut taxes and loosen regulations. These moves are making businesses more optimistic about their prospects while also boosting strong consumption.
However, the Fed is carefully considering these factors to ensure that the stimulus measures do not create additional pressure on inflation. Barkin emphasized: "We need to balance controlling inflation and supporting the economy, but we cannot act without careful calculation."
Inflation Risks Remain a Difficult Problem for the Fed This Year
With a tight monetary policy, the Fed’s actions not only impact the US economy but also have significant effects on the global financial market. Investors need to closely monitor new signals to develop appropriate strategies.
