PALO ALTO, California (Reuters) - The U.S. central bank will need further, deliberate interest rate hikes to bring inflation back down to its 2% goal, Richmond Federal Reserve Bank President Thomas Barkin said on Friday, noting that while inflation has likely peaked, it may not recede quickly.
"I think it will take time to return to target, and, as a consequence, believe we still have work to do," Barkin said in remarks prepared for delivery to the Stanford Institute for Economic Policy Research's annual economic summit. Policymakers have forecast "additional rate increases" and have been clear "we don’t anticipate rate cuts this year," he said.
Inflation by the Fed's preferred year-over-year gauge was 5.4% in January, an increase from the 5.3% pace in December. The Fed's target is 2% inflation. Barkin said he is not sure that the strength in spending that bolstered inflation is sustainable. Still, he said, the labor market is "quite tight."
The unemployment rate as of January was 3.4%, the lowest since 1969, and employers added more than half a million workers to their payrolls.
That's putting some upward pressure on inflation, he said, as workers ask for more pay. And two years of high inflation is prompting businesses to bank on the ability to continue to raise prices, he said, and meanwhile is "exhausting" for consumers seeking better deals and workers whose paychecks no longer go as far.
After raising the Fed's policy target from near zero to its current 4.5%-4.75% range in less than 12 months, "it makes sense to move more deliberately than we did last year," he said. "Here’s where I come back to data dependence. If I’m right and inflation persists, we can react by raising rates further. And, of course, I’d be happy to be wrong."
He did not say how high he expects rates to need to rise. Policymakers in December projected a top Fed funds rate of 5.1% this year, though many analysts and financial market participants now think the Fed will need to push it higher.
In the end, he said, the Fed needs to bring down inflation.
"I am confident it will in time but doubtful the process will be quick," he said.