Fed official says soft landing possible, but rate hikes still on table

ISTANBUL

The head of the US Federal Reserve Bank of Richmond said Wednesday a soft landing is possible for American economy, but added that more interest rate hikes are still on the table.

"A soft landing is increasingly conceivable but in no way inevitable," Tom Barkin said during his speech at the Raleigh Chamber of Commerce in North Carolina.

"The U.S. economy could run out of fuel. We could experience unexpected turbulence. Inflation could level off at a cruising altitude higher than our 2 percent target. And the landing could be delayed as the U.S. economy continues to defy expectations," he added.

A soft landing is a situation where the economy is slowed enough to lower inflation to the Federal Reserve's target without triggering a deep recession.

While many economists believed that the Fed's unprecedented monetary tightening from March 2022 through July 2023 risked pushing the US into a recession, in fact the economy expanded above expectations in the third quarter.

"The U.S. economy continues to defy expectations," said Barkin. "Consumer spending accounts for over 68% of the economy, and it is hard to make a case for a pullback so long as equity values are high and the labor market remains as tight as it is."

"Longer-term rates have dropped recently, which could stimulate demand in interest-sensitive sectors like housing. While you might think this would be a first-class problem, strong demand isn’t the solution to above-target inflation. That’s why the potential for additional rate hikes remains on the table," he explained.

The Fed in December skipped an interest rate increase for the fourth time during 2023, and kept its federal funds rate unchanged in the 5.25%-5.5% target range – the highest in 22 years.