Richmond Fed President Barkin, a 2024 FOMC voting member, said on Thursday that the Fed has time to assess whether the U.S. economy is normalizing or weakening, which would require officials to take stronger action.

Barkin said he was "optimistic" about inflation data in the coming months and believed the recent broadening of disinflation would continue.

“I think in a healthy economy, you have some time to judge whether this is an economy that is gently normalizing, which will allow you to move interest rates in a steady, cautious way, or whether the economy is now in a position where you really need to dive in,” Barkin said during an online event hosted by the National Association for Business Economics.

Fed officials have increasingly turned their focus to the labor market as inflation now nears their 2% target, but Barkin stressed that he does not see mass layoffs imminent.

Policymakers voted to keep interest rates unchanged at their highest level in more than two decades at last week’s FOMC meeting. Financial markets abruptly reassessed the Fed’s stance on interest rate policy after the July jobs report showed a marked slowdown in hiring and a rise in the unemployment rate to 4.3%, near a three-year high and a fourth straight month of increases.

Investors are now pricing in about a full percentage point cut in interest rates this year, according to futures markets. Some economists now expect the Fed to take a sharper 50 basis point cut at its next meeting in September.

The Fed’s preferred price indicator, PCE, rose 2.5% year-on-year in June. Another closely watched inflation measure, the Consumer Price Index (CPI), is due next week.

“You have to acknowledge that the data over the last few months has been very good overall and very good from a breadth perspective. All the drivers of inflation seem to be unwinding,” Barkin said. “I’m relatively optimistic and hopeful that that will continue.”

Speaking on the same day, Kansas City Fed President Schmid said that although inflation has exceeded the target, the labor market remains healthy, but he is not ready to support a rate cut.

Schmid said the recent decline in inflation was "encouraging" and that further low price pressures would increase his confidence that inflation is moving toward his 2% target, supporting a rate cut. "We are close, but not quite there yet," Schmid said. He gave no indication of when the Fed should cut rates: "The path of policy will be determined by the data and the strength of the economy."

“Overall, the labor market continues to look healthy. Last week’s July payrolls report led many to question that resilience. But it’s important to note that many other indicators point to continued strength,” Schmid said. Business contacts in the Kansas City Fed’s district “are generally optimistic and resilient,” he added.

Schmid, one of the more hawkish Fed officials, said inflation surged to multi-decade highs two years ago and progress needed to be assessed with caution. “We should look at the worst-case scenario in the data, not the best-case scenario.”

Article forwarded from: Jinshi Data