Fed official says monetary tightening will eventually slow US economy

Monetary tightening will eventually slow American economy further, president of the Federal Reserve Bank of Richmond said on Thursday.

"In March 2022, we kicked off our steepest tightening cycle in decades, raising the federal funds rate over 500 basis points in under 18 months," Tom Barkin said in a speech at Global Interdependence Center's Central Banking Series held in Paris, France.

"But overall, despite higher rates, banking turmoil and geopolitical challenges, the US economy has not seen a broader slowdown," he added.

American economy expanded 1.4% in the first quarter of 2024, according to the Commerce Department's third and final reading released Thursday. The figure is slightly revised up from the second reading of 1.3% made last month.

While the figure is significantly down from the 3.4% expansion recorded in the fourth quarter of 2023, the US economy has managed to avoid a recession despite the monetary tightening.

Barkin noted that American consumers make up nearly 70% of the US GDP, and said their strength has been "remarkable."

"Real wages have increased, especially for entry-level workers. Unemployment is low. In short, feeling wealthier and more stable, consumers seem to be comfortable spending more and saving less," he said, noting that saving rate stands at 3.6%, less than half of what it was before the coronavirus pandemic.

"So, the US economy, particularly its consumer, has been much more resilient to (interest) rate increases than most expected and is likely to stay so as long as valuations remain elevated, and unemployment remains low," he added.

Barkin reminded that inflation soared in the post-pandemic period, and said: "By the first quarter of 2022, the Fed's preferred inflation measure — the personal consumption expenditures price index (PCE) — had climbed to 6.6 percent, more than triple our 2 percent inflation target."

The latest data released earlier Friday showed that the PCE price index, which includes food and energy prices, annually rose 2.6%, after a 2.7% annual gain in April. That index, on a monthly basis, remained unchanged, following a 0.3% monthly increase in April.

The core PCE price index, which excludes food and energy prices, annually rose 2.6% in May, down from the 2.8% year-on-year gain in April. On a monthly basis, it increased 0.1% in May, also slowing its pace from a 0.3% month-on-month increase in April.