(Yahoo!Finance) - Richmond Fed President Tom Barkin once again urged caution about the direction of interest rates in a new speech Wednesday, reiterating that the potential for hikes is still on the table if inflation heats back up.
"A soft landing is increasingly conceivable but in no way inevitable," Barkin said in his speech in Raleigh, N.C.
He outlined a number of risks that could disrupt that soft landing, a term that refers to a scenario where inflation drops and the US economy slows without triggering a recession.
One such risk is that a recent drop in long-term rates could stimulate demand in interest-sensitive sectors like housing, which could push inflation higher again. The shelter and services components of inflation remain high, he noted.
"That’s why the potential for additional rate hikes remains on the table," added Barkin, who this year is a voting member of the Fed's interest rate setting committee.
Another risk is that the Fed's aggressive tightening campaign may not have hit in full force yet and could still push the economy into recession. Barkin on Wednesday cited certain data showing that interest payments are still only at 2019 levels for companies and households.
The Fed last raised rates in July, to a 22-year high, and in December Fed Chair Jerome Powell signaled the central bank had likely reached the peak on rate hikes and would turn attention to rate cuts looking ahead.
The comments sparked a market rally, as investors cheered the end of the most aggressive campaign to cool inflation since the 1980s.
Markets boosted bets on the number of cuts by the Fed this year and predicted the Fed will begin loosening in March.
Fed officials at their last meeting penciled in a median of three rate cuts for next year without saying when they could begin. The range of estimates is wide, from no cuts to as many as six among the 19 members. The market is pricing in six cuts.
Several Fed officials have used media interviews over the past month to throw cold water on whether cuts would actually happen or how quickly. Barkin told Yahoo Finance in an interview at the end of last year that he needed to see more conviction and consistency that inflation was coming down before considering rate cuts.
In his new speech Wednesday, Barkin encouraged Fed watchers to focus on inflation's progress rather than the path for rates forecast by Fed officials.
"Is inflation continuing its descent and is the broader economy continuing to fly smoothly?" Barkin said. "Conviction on both questions will determine the pace and timing of any changes in rates."
Recent data could make it easier for the Fed to justify a dovish shift in 2024.
The "core" Personal Consumption Expenditures index — which excludes volatile food and energy prices — clocked in at 3.2% for the month of November.
Another encouraging sign: Core inflation dropped to 1.9% on a six-month annualized basis, which is below the Fed’s target of 2%.
"We’re making real progress," Barkin said of inflation. "Contrary to most predictions, the economy has remained healthy as inflation has fallen."
By Jennifer Schonberger · Senior Reporter
