In a speech on Monday, US Federal Reserve Vice Chair for Supervision Michael Barr said that the Fed is likely to keep interest rates high for "some time" in order to bring down inflation.
Barr's comments echo the views of the majority of his colleagues, who recently lowered the number of rate cuts they expect in 2024, suggesting a longer period of high rates.
"The most important question at this point is not whether an additional rate increase is needed this year or not, but rather how long we will need to hold rates at a sufficiently restrictive level to achieve our goals," Barr told a conference in New York in prepared remarks.
"I expect it will take some time," he continued, adding that his decision would be guided by "a range of incoming data."
The Fed has raised its key lending rate 11 times since March 2022, lifting rates to a 22-year high in a bid to cool the economy and bring inflation down to its long-term target of 2%.
Higher rates make it more expensive to borrow money, which can slow economic activity and dampen demand for goods and services. This can help to bring down inflation, but it can also lead to job losses and other economic hardship.
Barr acknowledged the risks of a recession, but said he saw a "higher probability" of the US economy achieving a return to price stability without the degree of job losses that have typically accompanied significant monetary policy tightening cycles.
"However, the historical record cautions that this outcome could be quite difficult to achieve," he added.
The Fed is facing a difficult balancing act in its efforts to bring down inflation without causing a recession. Barr's comments suggest that the Fed is prepared to keep interest rates high for as long as necessary to achieve its goals.
Implications for the US Economy
A prolonged period of high interest rates would have a number of implications for the US economy.
For consumers, it would mean more expensive borrowing costs for mortgages, car loans, and other types of debt. This could dampen consumer confidence and spending, which is a key driver of economic growth.
For businesses, higher interest rates would make it more expensive to invest in new projects and expand their operations. This could lead to slower job growth and economic expansion.
Overall, a prolonged period of high interest rates would likely lead to slower economic growth and higher unemployment. However, it is important to note that the Fed is prepared to take these risks in order to bring down inflation.
