While the European currency and the British pound are trying to gain upside momentum to continue their bullish corrections initiated at the end of last week, Fed officials have shifted their focus from interest rates to inflation, particularly its target level.
Richmond Federal Reserve President Thomas Barkin stated that the US central bank could lose credibility if it were to consider changing its 2% inflation target before achieving that goal. "It's not like 2% is some magical unicorn of a number that we could never hit," he said at an event hosted by the Danville Pittsylvania County Chamber of Commerce in Danville, Virginia. Barkin, who doesn't vote on monetary policy decisions this year, did not express his opinion on when he believes rate cuts might start.
According to him, criteria that might allow for a reduction in rates include monitoring when inflation cools month to month and how consumer demand, which remains at a fairly high level, stabilizes. A recent monthly survey of 68 economists conducted August 11-16 showed that no one expects the US central bank to cut rates until the second quarter of next year.
This is three months later than the July estimate. Barkin also noted that the greater-than-expected easing in inflation in June could signal that the US economy is heading for a "soft landing," returning to price stability without a dmamging recession. At present, the regulator's preferred inflation gauge — the personal consumption expenditures index — added 3% in June from a year earlier, marking the smallest increase in over two years.
This is well below last year's figure of 7% when Fed representatives began the most aggressive policy tightening campaign in a generation.
Some leading economists have repeatedly noted that central banks should not keep monetary policy so tight. Olivier Blanchard, former chief economist at the International Monetary Fund, believes that regulators should stop tightening policy, especially after inflation drops to 3%.
Harvard University Professor Jason Furman, who was chairman of the White House Council of Economic Advisers from 2013 to 2017, even called for the Federal Reserve to consider raising the inflation target.
Notably, last month, the Fed raised the key interest rate to a target range of 5.25% to 5.5%, the highest level in 22 years. Now, especially after the Jackson Hole symposium, the debate has shifted from how high rates need to go to how long they should remain elevated
