Fed Official Warns Investors Against Betting on Interest Rates Cuts This Year: Hikes Are Still ‘On the Table’

Richmond Federal Reserve President Tom Barkin warned investors on Wednesday against assuming the central bank will cut interest rates next year, saying rate hikes were very much still on the table.

Wall Street is betting a 72% chance the central bank will cut rates by March and about a more than 95% chance by May, according to the CME FedWatch Tool, which is based on Fed Funds futures trading.

The Fed has defied all expectations in successfully steering the economy clear of a recession last year. Many believe it's going to be able bring the U.S. economy in for a so-called soft landing, where it slows inflation but not so much that it spurs a recession.

But Barkin said a soft landing isn't guaranteed.

"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% target. And the landing could be delayed as the U.S. economy continues to defy expectations," he said in prepared remarks before the Raleigh, N.C., Chamber of Commerce.

The economy has held up stronger than expected and a recent dip in longer-term interest rates could spark more demand, keeping inflation sticky.

"Strong demand isn’t the solution to above-target inflation," Barkin said. "That’s why the potential for additional rate hikes remains on the table."

Fed officials indicated in minutes from their November meeting that they were largely forecasting an end to their long spate of interest rate hikes and were looking forward to cuts this year. Since March 2022, the Fed has raised rates to a 22-year high of 5.25% to 5.5%, pushing up the costs of everything from mortgages to credit cards.

Barkin, who is a voting member this year on the central bank's rate-setting Federal Open Market Committee, also acknowledged progress on inflation and said the soft landing scenario for the economy is still conceivable.

“Everyone is talking about the potential for a soft landing, where inflation completes its journey back to normal levels while the economy stays healthy. And you can see the case for that," he said.

The Fed’s favorite inflation gauge, the personal consumption expenditures price index, clocked in at an annualized 2.6%, and it was up 3.2% excluding food and energy. That’s still above the Fed's 2% target. But Barkin said that on a six-month basis PCE inflation, excluding food and energy, is running at 1.9%.

"Contrary to most predictions, the economy has remained healthy as inflation has fallen," he said.

His speech came three weeks after the FOMC declined to raise interest rates and hours before the Fed was set to release minutes from that meeting that will offer more indications about where other officials stand. In their last minutes, committee members indicated three quarter-point interest rate cuts could be coming this year.

Barkin extended the soft landing metaphor in laying out the risks he sees ahead.

"The airport is on the horizon," he said. "But landing a plane isn’t easy, especially when the outlook is foggy, and headwinds and tailwinds can affect your course. It’s easy to oversteer and do too much or understeer and do too little. ...  I will note that there’s no autopilot. And the data that come in this year will matter."