Inflation and the labor market in the US continue to pose significant uncertainty, with annual core prices unlikely to fall much further until next year, emphasized Tom Barkin, president of the Federal Reserve Bank of Richmond, in a recent address. Last month, the central bank's Federal Open Market Committee executed its first rate cut since March 2020, lowering the benchmark lending rate by 50 basis points.
This decision follows a period of tightened monetary policy from March 2022 through July 2023, aimed at combating inflation. "While we have made real progress, there remains significant uncertainty on both inflation and employment," Barkin remarked during his prepared remarks for a speech delivered in Wilmington, North Carolina.
Presently, the 12-month headline personal consumption expenditure inflation stands at 2.2%, a notable reduction from its peak of 7.1% seen in June 2022. Meanwhile, the core measure of inflation is now at 2.7%. Despite this progress, Barkin projected that the 12-month core inflation is not expected to cool "much further" until 2025, as the economy continues to reflect low readings from late 2023.
Barkin expressed caution: "I'm not yet confident nor cynical enough to declare victory," highlighting that inflationary pressures remain prevalent. He cited multiple factors contributing to this situation, including recent union actions, a reduction in labor supply, and an escalating geopolitical situation in the Middle East that could potentially drive inflation higher.
Furthermore, Barkin noted that the hiring rate has regressed to levels observed in 2013, indicating that job gains are continually being revised downwards. Sectors such as healthcare, which previously experienced growth due to pandemic-induced shortages, are now moderating their expansion. Despite these challenges, Barkin conveyed that overall US economic activity continues to be robust.
Official data, anticipated to be released on Friday, is expected to reveal that the economy added 150,000 nonfarm jobs in September, reflecting an increase from the previously reported gain of 142,000 jobs for August, as indicated by a Bloomberg survey. Barkin reflected on the implications of the September rate decision, viewing it as a recalibration towards a slightly less restrictive policy stance.
Looking ahead to 2024, the median Federal Open Market Committee member projected an additional 50 basis points of rate cuts, contingent on expected data trends. Barkin concluded with a note on the decision-making process: "As we determine how quickly to proceed and the extent of our actions during this rate-reduction cycle, we must remain attentive and adaptive to emerging realities.".