The Federal Reserve faced a particularly vexing decision this week: Should it raise interest rates during a bank crisis?
For Tom Barkin, the decision wasn’t especially challenging. Inflation, he says, remains public enemy No. 1.
“Inflation is high. Demand hadn’t seemed to come down. And so, the case for raising was pretty clear,” Barkin, the president of the Federal Reserve Bank of Richmond, told CNN in an exclusive interview on Friday.
Barkin, who participates in the Fed’s debate but doesn’t have a vote this year, conceded that every decision is “hard” and fully debated.
But the economic reports heading into this week’s Fed meeting suggest the economy remains too hot. The Fed ultimately reached a unanimous decision to raise interest rates for the ninth meeting in a row.
“The labor market is tight. Historically tight,” Barkin said. “Inflation, unfortunately, has stayed too high.”
Some experts, including former FDIC Chair Sheila Bair and Moody’s Analytics Chief Economist Mark Zandi, urged the Fed not to exacerbate turmoil in the banking system by raising interest rates following the failures of Silicon Valley Bank and Signature Bank.
“For me, the question was: Do you see such stresses happening that you felt like you really had to pull back and learn more?” said Barkin. “It felt very stable by the time we got there. So, the conditions were right to do monetary policy the way we want to do monetary policy.”
Jobs vs. inflation
Some politicians, on the left and right, have blasted the Fed for raising rates so rapidly that mass layoffs could ensue.
Massachusetts Democratic Sen. Elizabeth Warren told CNN’s Jake Tapper on Wednesday that Fed Chair Jerome Powell is doing a “really terrible job” and is “trying to get two million people laid off.”
Asked about the argument from politicians that the Fed wants people to lose jobs, Barkin stressed that the public is very upset with the high cost of living.
“The one thing that I hear loud and clear from everybody is that they hate inflation. They find inflation to be unfair,” Barkin said, referring to talking to residents in his Fed district. “You get a raise and then you have to spend that raise at the gas station. That creates uncertainty. It’s frankly exhausting. And I think it’s exhausting to have to shop around for better prices or to explain, you know, your need for a price increase to your customers.”
Barkin added, “People really want us to get control of inflation. That’s what they want us to do. We’re the guys charged to do it.”
The Fed, not the White House, is responsible for maintaining price stability. The other part of the Fed’s mandate, of course, is fostering maximum employment.
“If you can bring inflation down, that creates the conditions for a better jobs market. I think this is the right thing to be focused on,” Barkin said.
Banking stress creates uncertainty
On the banking crisis, Barkin said he’s been “pretty encouraged by how resilient” banks in his district have seemed to be. Barkin also said he’s not seeing “major” deposit outflows, which echoes comments from Treasury Secretary Janet Yellen and other Fed officials.
New Fed data indicates banks are lining up to get emergency loans from the Fed, including from the discount window and a newly-launched bank lending facility aimed at preventing future bank failures.
The spike in borrowing from the Fed doesn’t surprise Barkin, he said.
“In a time of uncertainty, we actually encourage banks to use it, to find ways to take money to reassure…depositors that they’ve got access to capital,” he said. “It’s good that people are tapping it to make sure they’ve got precautionary funds should they need it.”
Could the Fed cut rates?
Looking ahead, the Fed is penciling in another quarter-point rate hike. However, investors are very skeptical. Futures markets indicate the market is betting the Fed is done, with an 87% chance of no change in rates at the next meeting in May and a significant chance of a rate cut by July.
Asked about the rate cuts signaled by the market, Barkin pointed to the latest Fed projections where none of the 18 officials surveyed project a rate cut this year.
Barkin said future Fed moves will be based on what happens to demand and thus inflation over the next several months. He left open the possibility that the Fed may have more work to do if the banking turmoil fades.
“If inflation is to stay elevated, then we’ll have to do more,” he said. “If inflation doesn’t, either because of the lagged impact of rate moves to date, or because of the ebbing of the pandemic era’s excess spending or because of potentially stresses in the environment, then you’d do less.”