Rate path is straightforward; the question is timing, Richmond Fed's Barkin says
With demand being solid and inflation remaining elevated, the policy "path is pretty straightforward," said Richmond Fed President Tom Barkin at a conference on Thursday. "The question is pace."
The Federal Open Market Committee raised its rate for the first time in three years in September and skipped a hike in October. A gradual pace "still makes sense," he said during CNBC's CEO Summit.
While traders are largely pricing in a December hike, their conviction has eased somewhat recently. The probability of a 25-basis-point increase to 4.00%-4.25% stands at 76.2%, down from 79.9% a week ago, according to the CME FedWatch tool.
Inflation is the most important risk facing the economy, he explained. "I'm not hearing that it's escalating, but I'm not hearing that it's diminishing," Barkin said.
Currently, the Richmond Fed considers policy to be "somewhere around neutral."
However, nominal consumption at a "relatively elevated" level implies that policy is "somewhat accommodating," he said.
A big part of the demand story is AI. But Barkin doesn't expect that raising rates would make a major impact on the investments being made in AI. "Rates are not the No. 1 thing that would reduce AI investment," he said. "There's a lot of cash out there."
By contrast, rates more directly affect sectors like housing, which moves based on mortgage rate levels.
And while inflation is the Fed's primary focus right now, it also has to watch the employment side of its mandate, Barkin said.
Currently, that doesn't appear to be a problem. Productivity has expanded over the last five or six years, but he doesn't attribute that to AI. Barkin credits the combination of investments made two, three, or four years ago and continued economic growth.
Fiscal policy: The budget level makes a strong case that fiscal policy is expansionary, he said. "We try not to forecast policy, but we have to react to policy," he said. "You react to whatever's happening, and you try to stabilize the labor market and inflation."
Data centers: The challenge that data centers have is there's an initial burst of activity to build the facility, Barkin said. But after that, they don't require many employees working at the facility.
"There's no natural support constituencies for data centers besides the developers who want the tax incentives," he said.
Fed meeting schedule: After the October FOMC meeting, Fed Chair Kevin Warsh announced a plan to reduce the number of rate-setting meetings per year from the current eight to seven in 2027 and to six in 2028.
"I don't think it's a big deal whether we meet every six weeks or every eight weeks," Barkin said. "I really don't like walking out of an FOMC meeting then getting the jobs report on Friday." Making rate decisions every two months would give the policymakers more complete data, he noted. Furthermore, the Fed may be able to time the meetings with a consideration of when important data will be released.
If the FOMC meets less frequently, it may be more likely to raise by 50 basis points instead of 25. The meeting schedule is "not on my top 100 list" of things to worry about, he added.
Bank lending: In discussing risks in the lending landscape, Barkin explained that there's a lot of transparency in bank system lending. That gives him confidence in lending on the banking side. But there's a lot less transparency in non-banking lenders.
Alternative inflation data: It's difficult to get better inflation data than the government's, he said. PCE is better than CPI. "I haven't found a better way" to measure inflation, he noted.
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