The Federal Reserve Committee took the lead in "hawking": a soft landing is not a sure thing to happen and it is still possible to continue to raise interest rates
Finance Associated Press, January 3 (edited by Zhao Hao) On Wednesday (January 3) local time, Richmond Fed President Thomas Barkin said that he was confident that the U.S. economy was on the path to a soft landing, but some obstacles remained. Therefore, monetary policymakers, including him, need to remain cautious.
Last month, the Fed maintained the target range for federal interest rates at 5.25% to 5.50% for the third time in a row in its interest rate decision. At the press conference, Fed Chairman Jerome Powell also revealed that the bank believes that the level of interest rates has reached or is close to peaking, and the central bank has begun to discuss the timing of interest rate cuts, which made financial markets extremely excited.
According to the latest release on the Richmond Fed's official website, Barkin wrote in a speech titled "Heading for a Soft Landing?" that "we're making real progress, and now everyone is talking about the possibility of a soft landing, with inflation returning to normal levels while the economy remains healthy." You can see all of that. ”
According to the data, the Fed's favorite price indicators, the PCE price index in November, rose 2.6% year-on-year, and the core PCE rose at an annual rate of 3.2%, both well below the peak in mid-2022, but still some distance from the Fed's 2% target. In response, Barkin noted that core inflation on a six-month basis has reached 1.9%, slightly below target.
Barkin likened the Fed's job to "pilot-pilot-landed" and identified four major risks ahead: first, the economy "may run out of fuel" and growth may reverse, and second, unexpected turbulence, such as some geopolitical event or the regional banking shock last March.
Third, it landed at the wrong airport, i.e., inflation did not meet the central bank's 2% target, and fourth, "delayed landing" – demand unexpectedly remained strong, making it difficult for inflation to subside. The Associated Press also mentioned the possibility of such a "no-landing" scenario last year.
"The airport is right in front of you, but it's not easy to land, especially when the outlook is foggy, and both headwinds and tailwinds can affect your course." In this case, it's easy to oversteer and do too much, or understeer and do too little. ”
On the day of the decision, the Fed released a "dot plot" showing that officials believe that by the end of 2024, the bank's interest rate will fall to 4.75% to 5%, 75 basis points below current levels. By comparison, the market was expecting a rate cut of 125 or 150 basis points this year.
As the Federal Open Market Committee's (FOMC) rotating member this year, Barkin did not reveal in his speech which point on the chart he predicted. But he noted that there is also a risk that the Fed's work to bring down inflation may not be over yet.
"The recent decline in long-term interest rates [on US Treasuries] could spur demand in rate-sensitive sectors such as housing, which is why the possibility of further rate hikes remains. "A soft landing is becoming more and more likely, but it is by no means inevitable." ”
Later in the day, the Fed will release the minutes of its December monetary policy meeting.
(Finance Associated Press Zhao Hao)