By In a recent speech in New York, Federal Reserve Gov. Michael Barr discussed the central bank’s biggest challenge – determining the optimal duration to maintain high interest rates in order to curb inflation. According to Barr, the key question is not whether another rate hike is necessary this year, but rather how long rates need to remain sufficiently restrictive to achieve their goals. He believes that this process will require a considerable amount of time.
While the Fed decided to keep its benchmark short-term interest rate unchanged at 5.25% to 5.5% two weeks ago, there is still a possibility of another rate hike before the end of the year if inflation fails to further slow down towards the Fed’s target of 2%.
Barr highlights that since he joined the Fed last year, the inflation rate has significantly decreased. In fact, the annual increase in prices dropped to just under 4% last month from its peak of 9.1% in 2022, which was a four-decade high.
Furthermore, Barr suggests that the effects of higher borrowing costs are still impacting the economy and will likely contribute to lowering inflation. However, he also acknowledges that the economy has demonstrated surprising resilience.
Although Barr now sees a higher probability of the U.S. economy achieving price stability without experiencing substantial job losses as a result of monetary policy tightening, he cautions that historical records indicate this could be a challenging outcome to attain.
Comments