Disagreement between Fed Bank Presidents on future policy met by market moves
The President of the Federal Reserve Bank of Richmond stated, today, that the US central bank should remain open to interest rate hikes in the case of sticky inflation.
“If inflation comes down naturally and smoothly, awesome,” Barkin said at the CNBC CFO Council Summit today. “But if inflation is going to flare back up, I think you want to have the option of doing more on rates.”
Bloomberg reports that Barkin emphasized skepticism about the growing consensus that inflation is on a downward path.
Stocks had been adding significantly to their rallies this morning, driven in large part by bets that the Fed would succeed in negotiating a soft landing for the US economy. That comes after signs of cooling inflation and stronger than expected economic data.
Barkin’s comments, however, pulled the S&P 500 back from its session highs.
Barkin’s colleague, Federal Reserve Bank of Atlanta President Raphael Bostic, released an essay on Wednesday which argues that the course of inflation and economic growth is becoming more clear. Bostic believes that inflation is moving in a downward trajectory and expects both a slowdown in inflation and economic activity to continue over the coming months.
His essay reads, in part, ““our intelligence leads me to believe economic activity will slow in the coming months, in part because restrictive monetary policy and tighter financial conditions are creating greater restraint on economic activity.”
According to Bloomberg these comments are consistent with Bostic’s recent remarks. The essay does not specifically address interest rates, he has previously stated that he does not think more hikes are necessary.
Markets interpreted these two divergent viewpoints, as well as recent economic data, to broadly imply a ‘goldilocks’ soft landing was likely. US GDP growth for Q3 was revised unexpectedly higher today to 5.2% but consumer spending only advanced at 3.6% and the personal consumption expenditures price index — which Bloomberg reports is the Fed’s preferred inflation metric — was revised lower.
In addition to a November rally in stocks, global bond prices are rising at the fasted pace since the Great Financial Crisis. Consensus appears to be forming around the idea that the Federal Reserve has finished their rate hiking, according to Bloomberg.
