Fed's Barkin: Interest rates should be moved rapidly to neutral

Reuters reports that the US Federal Reserve should quickly get interest rates up to a level where borrowing costs will no longer be stimulating the economy and should raise them further if high inflation proves persistent, Richmond Fed President Thomas Barkin said on Tuesday.

Key comments

"How far we will need to raise rates, in fact, won’t be clear until we get closer to our destination, but rest assured we will do what we must to address this recent bout of above-target inflation," Barkin said in remarks prepared for delivery to the Money Marketeers in New York.

"The best short-term path for us is to move rapidly to the neutral range and then test whether pandemic-era inflation pressures are easing, and how persistent inflation has become. If necessary, we can move further."

''If bouts of high inflation do become more common in the future than they were before the pandemic,'' Barkin said,

"Our efforts to stabilize inflation expectations could require periods where we tighten monetary policy more than has been our recent pattern."

''Doing that could create communication challenges as Fed policymakers explain why stabilizing prices may need to be balanced against costs to employment.''

The comments followed today's volatility in the US dollar when the markets moved away from it following an unexpected miss in the Core Consumer Price Index.

Core CPI fell short of estimates, suggesting that the Federal Reserve might not need to be in such a hurry that the market has been pricing for. Core CPI, which excludes food and energy prices, moved up by just 0.3%, below the 0.5% expectations and the smallest increase since September. 

However, with inflation expectations remaining relatively steady, the dollar bounces back and went on to score fresh cycle highs in 100.333 DXY. If the 10-year yield continues higher beyond the 2.836% highs set this week, it could be on track to test the October 2018 high near 3.26%.