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Fed’s stance on breakeven rates fights inflation and pandemic unknowns: Barkin

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By Howard Schneider

BALTIMORE, US, March 18 (Reuters) – The projected rate hikes for Fed officials this week represented a “balancing act” between the need to start normalizing monetary policy in the face of high inflation and protection against a rapid credit tightening that could hurt the economy, Richmond Fed President Thomas Barkin said on Friday.

“The rate path that we announced this week should not drive the economic downturn. We are still far from the level of rates that limits the economy,” Barkin said at a Maryland Bankers Association economic forum, in what were his first comments. Governments since the US central bank lost a quarter percentage point rate hike on Wednesday.

“Think of it as an indication that the extraordinary support from the pandemic era is fading,” Barkin said. The fed funds rate has been near zero since March 2020.

The new projections showed that the median of Fed officials’ projections envision raising that rate to 1.9% for penalties this year, still below the 2.4% that policymakers believe is impact-neutral. in economic decisions.

Amid calls from some officials for faster increases in borrowing costs, Barkin said the Fed could act more quickly, even in half-percentage-point increases, “if we start to believe that’s necessary to prevent expectations from falling.” of inflation become unanchored”.

But he added that such a shift does not seem to be happening so far, and in the meantime it remains uncertain how quickly some of the pandemic’s lingering problems, from supply chain issues to skewed demand for goods, will be resolved.

Until that is clear, Barkin said, it will be difficult to know how quickly the Fed should raise interest rates.

“Setting the right pace for rate increases is a balancing act: We normalize rates to contain inflation, but if we correct them too much, we can negatively impact employment, which is the other part of our dual mandate. And we have some time to get to a neutral position,” Barkin said.

“Inflation and employment are still heavily influenced by the pressures … of the pandemic era, and more recently, the war in Ukraine, and it will take us a while to understand and learn about the dynamics of the post-war economy. pandemic,” he added.

(Reporting by Howard Schneider; Editing in Spanish by Juana Casas)

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