Michael Barr, Vice Chairman of the Federal Reserve for Financial Regulatory Affairs, said that before starting to cut interest rates, the Fed needs to see more data indicating that inflation is returning to 2%.
Bar said on Wednesday, "As Chairman Powell pointed out at a recent press conference, my colleagues at the Federal Open Market Committee and I believe we are on the path to 2% inflation, but before we start lowering the federal funds rate, we need to see sustained good data."
"I fully support his approach of carefully considering policy normalization in the current situation," he added.
Bar also stated that the stronger than expected inflation data released on Tuesday reminded people that the path back to the Federal Reserve's inflation target may be "bumpy".
Federal Reserve officials spent most of the first six weeks of this year working to dispel market expectations that the Fed would cut interest rates at its next policy meeting in March. Powell has stated that the Federal Reserve needs more confidence that inflation is on a path back to its target, while other policymakers have warned that there are several risks that could keep inflation above 2%.
"Given the limited historical experience of growth and inflation dynamics we are currently facing, as well as the lack of modern experience in recovering from global pandemics, we have another reason to act cautiously," said Bar
He also stated that the resolution of supply chain issues and the return of labor have helped reduce inflation, but have not had a serious impact on economic growth or employment. He pointed out that there is still room for sustained growth in productivity (i.e. output per hour) in the near future.
"To some extent, the increase in productivity may come from those parts that will continue to produce improvements, such as the integration of new technologies, new ways of working, and a significant increase in new business forms," he said.
Bar pointed out that the progress of inflation is largely due to the deflation of commodity prices, but this trend may have come to an end. He said that there is room for housing prices to fall, and a slowdown in wage growth should help alleviate the price pressure on the service industry.
Despite that, Bar emphasized that the Federal Reserve "does not target sub components of the economy.". He said, "We need the overall economy to fall below our goals."
Bank Resilience
Bar also reiterated his long-standing view that the US banking industry is healthy and stated that he believes "there are no signs of liquidity issues in the entire system.". Bar said that although the disappointing performance and higher loss provisions of New York Community Bank have led to a significant drop in the bank's stock price, this does not represent anything.
"A bank's failure to meet revenue expectations and increase provisions does not change the overall strength of the banking system. The Federal Reserve will continue to closely monitor the risks in the banking industry," he added.
He also stated that he remains focused on improving the channels for banks to utilize the Federal Reserve's discount window, and reiterated that banks should be "fully prepared" to borrow from the discount window in times of liquidity constraints. The discount window is the traditional guaranteed loan program of the Federal Reserve.
According to reports, the Federal Reserve and other banking regulators are preparing to launch a plan that requires banks to use discount windows at least once a year to ensure they are prepared for difficult times.
Bar also stated that the process of the Federal Reserve reducing its balance sheet has been "going smoothly". This process will ultimately lead to a decrease in reserves in the system, but Barr said that the Federal Reserve still has a "buffer" before reserves begin to decline significantly.
"It is important to closely monitor market conditions before pressure arises," he emphasized.