Fed's Barkin says price pressures may not fade as fast as expected

By Howard Schneider

WILMINGTON, North Carolina (Reuters) - The U.S. central bank's fight to return inflation to its 2% target may take longer than expected to complete and limit how far interest rates can be cut, Richmond Federal Reserve President Thomas Barkin said on Wednesday.

In an interview with Reuters, Barkin said he supported the half-percentage-point rate cut the Fed approved last month and agreed the benchmark rate could fall perhaps by another half a percentage point by the end of this year to take account of how far inflation has declined.

But he said he was concerned inflation could prove sticky next year and prevent the Fed from cutting rates as far as investors and some of his colleagues expect, with the benchmark rate potentially being held short of the "neutral" level many policymakers expect to reach.

Beyond the next few months and into the second half of 2025, "I'm more concerned about inflation than I am about the labor market," Barkin said, with a combination of continued solid demand and renewed tightness in the labor market making it hard for the Fed to travel the "last mile" in lowering inflation.

"I'm not talking about some big resurgence ... But I do think getting stuck is a very real risk," he said after a speech to an economic conference organized by the University of North Carolina Wilmington. "There are pressures out there which work against us getting the final mile done."

The Fed lowered its benchmark interest rate to the 4.75%- 5.00% at its meeting last month, and new economic projections showed policymakers anticipate the rate will fall through 2025 and into 2026 to around 2.9% - a "neutral" level that is felt to neither encourage nor discourage spending and investment.

The Fed is expected to cut interest rates by a quarter of a percentage point at its Nov. 6-7 meeting, a step Barkin said would be a "reasonable path" if the unemployment rate and inflation stay roughly stable, as he expects.

Barkin's views are a counter of sorts to the market narrative that the Fed is on a steady path to a neutral rate, conjecturing that, instead of a "soft landing" from inflation, in which inflation is tamed without a painful recession, the central bank may face a "no-landing" situation and some potentially uncomfortable choices late next year.

'WAGE PRESSURE'

Barkin said the Fed's ability to reach a neutral interest rate hinges heavily on how the economy behaves heading into the second half of 2025, which could hold the prospect of ongoing economic growth but the risk of inflation lodged above the central bank's 2% target.

In particular, he said immigration may not provide the same boost to labor supply as it has in recent months, allowing growth without excessive wage pressure, consumers may be spurred by lower interest rates to buy big-ticket items like homes and autos, and global risks including deglobalization and the fallout from regional military conflicts could deliver unexpected price shocks.

"As long as demand stays anywhere near healthy, I think we're going to use up the available supply" of labor, Barkin said.

"No one would be happier if we got into the first quarter and inflation continued to look settled, and that would give you the confidence to say ... 'lets go back to neutral,'" he said.

But "normalization comes when you're convinced that inflation hits 2%," Barkin said, adding that he remained "open-minded" on how fast rates can fall and if they can be reduced to the level where monetary policy is neither encouraging nor discouraging buying and spending.

For the next few months, Barkin said he agreed the risks were "modest on inflation and meaningful on unemployment," with an open question whether the jobless rate will flatten out from here, as he expects, or start to rise.

From there, he said things are less certain, and noted that the port strike that began on the U.S. East Coast and Gulf Coast this week, and the wage increases of 50% or more being discussed as possibly needed to settle it, did not seem like evidence of collapsing inflation or a weak economy.

"That feels like wage pressure," Barkin said, and a reason to view current rate cuts as a needed "recalibration" of policy that may or may not give way to a full-scale "normalization."

"My take is dial back the level of restraint, see where you are," he said.

(Reporting by Howard Schneider; Editing by Paul Simao)