July 11, 2019 / 4:36 PM / 6 days ago

Fed's Barkin sees little case for cutting interest rates

FILE PHOTO - Federal Reserve Bank of Richmond President Thomas Barkin poses during a break at a Dallas Fed conference on technology in Dallas, Texas, U.S., May 23, 2019. REUTERS/Ann Saphir

VICTOR, Idaho (Reuters) - Richmond Federal Reserve President Thomas Barkin on Thursday delivered a strong dose of skepticism over cutting U.S. interest rates, saying a small rate cut is unlikely to budge business pricing decisions and a large one risks unleashing unwanted inflation.

U.S. unemployment is at a 50-year low of 3.6%. And inflation, even if a touch below the Fed’s 2% goal, is low and stable, Barkin said in remarks prepared for delivery to the Global Interdependence Center’s annual economic summit.

“I don’t see the current levels of inflation or inflation expectations as a trigger for additional accommodation,” Barkin said. With inflation muted, he said, “there isn’t much case for stepping on the brakes. With unemployment so low and consumer spending so healthy, it’s equally hard to make a case for stepping on the gas.”

Financial markets are betting heavily on a rate cut later this month when Fed policymakers meet in Washington to set policy. Fed Chair Jerome Powell, in testimony on Capitol Hill this week, fed that narrative with promises to “act as appropriate” amid rising trade tensions between the United States and its biggest trading partners that is sapping business confidence.

Barkin said he is increasingly worried about rising uncertainty and “fragile” business confidence, and that he does not discount the idea that weak confidence could sap spending and push the U.S. into recession.

But, he said, businesses are very settled in their pricing routines, and there are more costs than benefits to trying to get them to raise prices.

Barkin’s comments raise the possibility that the debate later this month could be less about the size of a possible rate cut, as traders of short-term interest rates are betting, but rather over whether to do a rate cut in the first place. Barkin is not a voter on Fed policy this year, but he does take part in the discussions as one of 17 policymakers around the table.

“It strikes me as tricky to intervene in pursuit of an imprecise benefit; if one tries too hard to use low rates to get reflation, you might end up, not for the first time, with excess leverage and frothy valuations,” Barkin said.

Reporting by Ann Saphir; editing by Diane Craft

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