Fed’s Barkin says economy might avoid recession if inflation continues to ease

If inflation continued to slow, the Fed to forego further increases in U.S. interest rates and give the economy more breathing room. Higher rates typically depress the economy.

The Fed last week raised a key short-term interest rate for the 11th time in less than a year in a half. That brought the rate up to a top end of 5.5% from near zero in the spring of 2022.

The central bank has been trying to slow inflation without tipping the economy into a recession. The Fed is still weighing whether to raise rates again in September, but recent comments by senior officials suggest they might stay on hold.

The increase in inflation over the past year slowed to 3% in June from a 40-year high of 9.1% last year, based on the consumer price index.

Other measures of inflation, however, still show prices rising at a 4%-plus annual pace, more than double the Fed’s 2% target.

“Inflation remains too high,” Barkin said in prepared remarks. He is not a voting member this year of the Fed’s interest-rate setting panel.

Barkin did say he expects the economy to soften.

“Further slowing is almost surely on the horizon. A number of pandemic-era fiscal support programs are ending,” he said. “Rate increases work with a lag. Many models estimate their impact should start to really hit around now.”

Barkin was not convinced a recession was inevitable due to rising interest rates, however.

He said major pandemic-related changes in the economy have helped to shield the U.S. from a downturn. Household have extra savings and businesses have plenty of pentup demand.

“So, why haven’t we seen a recession? I think it’s because the pandemic is still with us — not the public health crisis, thankfully, but the economic dislocation it unleashed,” he said.