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Richmond Fed's Barkin Supports Steady Rate Stance

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05/15/2019 | 01:21pm EDT

By Michael S. Derby

NEW YORK -- Federal Reserve Bank of Richmond President Thomas Barkin said Wednesday he supports the central bank's steady rate stance, in a speech that highlighted the importance of sentiment in how the economy performs.

With inflation below the Fed's 2% target, "it makes sense to remain patient" and keep short-term interest rates at current levels for the time being, Mr. Barkin said in the text of a speech prepared for delivery before a gathering of the New York Association of Business Economists. "There's not a strong case to push rates higher when inflation is under control; there's not a strong case to move lower when growth remains healthy," the official said.

Mr. Barkin's comments on Wednesday were his first direct remarks on monetary policy and the economy in some time. The policy maker, who took office at the start of 2018, isn't currently a voting member of the interest-rate setting Federal Open Market Committee. The most recent FOMC meeting saw the overnight target rate range maintained at between 2.25% and 2.50%, which no signal from officials that will change soon.

Fed officials are dealing with an economy that's growing solidly amid robust job gains. But inflation continues to fall well short of their 2% target, giving them space to refrain on rate actions until more clarity arrives. Most at the Fed believe the weakness of inflation right now is temporary, but others aren't so sure, and financial markets are increasingly reckoning the Fed may have to lower rates before the year is out.

Mr. Barkin was upbeat about the current state of the economy, but he spent much of his speech explaining how consumer and business sentiment is both volatile and very important to how the economy performs.

"I believe our economy's performance is driven in important ways by the outlook and beliefs of consumers and businesses -- over and above what the hard data, and past patterns in it, by themselves would imply," Mr. Barkin said. "In other words, having the incoming data is one thing, but knowing what consumers and companies think about the road ahead is quite another," he said.

Mr. Barkin recounted the wild the economy has undergone in recent months, in which recession fears flared into the close of 2018 and the start of 2019, only to see optimism rise amid continued strong data and unexpectedly strong first quarter growth. Sentiment levels are again darkening amid renewed trade tensions between the U.S. and China.

"One reason I'm patient is I believe our economy had a short-term 'sentiment shock' at the end of last year and the beginning of this year, " Mr. Barkin said. More generally, the official said news travels faster and there's more of it, and in a world where many consumers and businesses still carry negative outlooks borne of the financial crisis, that means sentiment can change quickly with a real-world impact.

"I don't discount the idea that we could talk ourselves into a recession, " Mr. Barkin said. He added that monetary policy has a role to play here, and that what's expected of rates can send unexpected signals that also influence sentiment.

Mr. Barkin remains upbeat about the economy. "The labor market also remains strong" and "most forecasters anticipate continued growth this year, as do I."

"I still see an economy that is sound. But confidence -- especially business confidence -- is fragile. It's our job as policy makers to try to support it," he said.

Write to Michael S. Derby at michael.derby@wsj.com

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