Fed’s Barkin says inflation-rate drop may be soft-landing signal

Federal Reserve Bank of Richmond President Thomas Barkin said the greater-than-expected easing in inflation in June may be an indication that the U.S. economy can have a “soft landing,” returning to price stability without a damaging recession.

“There is still a plausible story that inflation normalizes in short order and the economy dodges additional trauma,” Barkin said Thursday in a speech in Blacksburg, Virginia. “Certainly, last month’s inflation read was a good one and I hope it is a sign. To be sure, the Fed’s objective is not to cause a recession; it’s to reduce inflation, in line with our mandate.”

Barkin didn’t specifically address the need for still higher interest rates in his prepared remarks. The Federal Open Market Committee meets next in September, so policymakers will get additional reads on inflation and employment prior to that decision.

A report Friday showed the Fed’s preferred inflation gauge, the personal consumption expenditures price index, rose 3% from a year earlier in June, the smallest increase in more than two years. Core prices — which exclude food and energy and are regarded as a more reliable signal of underlying inflation — advanced 4.1%. 

The Fed raised interest rates by a quarter percentage point at its July 25-26 meeting, bringing the fed funds rate to a range of 5.25% to 5.5%, the highest level in 22 years. Policymakers have slowed the pace of increases after aggressively tightening rates to bring down an inflation rate that last year reached a 40-year high. The latest hike followed a pause at the June meeting.

Further slowing in the economy is likely as a number of pandemic-era fiscal support programs are ending and because the impact of rate increases work with a lag, Barkin said.

He repeated his view that policymakers will be resolute to bring down inflation. “We learned in the ’70s that if you don’t get inflation under control, it comes back even stronger,” he said.

Barkin pointed out that economists have been incorrectly predicting a recession since late last year, but that most downturns are not expected and result from some shock. While a few industries — including housing, banking and commercial real estate — have had “mini-recessions,” much of the economy has been resilient, he said.

Speaking to the Montgomery County Chamber of Commerce, Barkin said businesses are seeing healthy demand and consumer spending remains solid. He cited strong sales for the movie Barbie as well as Taylor Swift’s “billion-dollar tour.”

“Consumers continue to spend, funded by excess savings accrued during the pandemic, elevated equity and housing wealth, and a robust jobs market,” he said. “This year, the drop in gasoline prices has freed up additional spending capacity.”