Fed's Barkin says interest rates need to rise to 'normal' levels

Federal Reserve Bank of RichmondRichmond Fed President Tom Barkin, a former top executive at McKinsey, says many firms still don't think they can pass on higher prices to consumers.

Solid growth, low unemployment and inflation running at around a 2% annual rate "calls for" moving interest rates back to normal levels, and the U.S. central bank "should follow through," said Richmond Fed President Tom Barkin, on Wednesday.

"It is difficult to argue that lower-than-normal rates are appropriate when unemployment is low and inflation is effectively at the Fed's target," he said. "In addition, we don't want to risk the credibility of our commitment to low and stable inflation. That means when the economy calls for moving back to normal levels, as do the conditions I just described, we should follow through."

In a speech in Roanoke, Va., Barkin said he didn't know how high rates will need to rise to achieve "normal." That depends on economic growth, he said.

"The higher the underlying growth prospects, the higher the policy rate," he said.

Barkin, a voting member of the Fed's interest-rate committee, echoed last week's Fed statement, saying the economy is "strong."

"Overall, it's starting to feel like we've got some tailwinds rather than headwinds," he said.

The Fed has penciled in two more interest rate hikes this year and three in 2019.

MarketsSPX, -0.14% have priced in two more rate hikes this year but are "counting on the possibility the Fed won't be able to move as much as they have been signaling in 2019," said Rick Reider, chief investment officer of global fixed income at BlackRock, in a recent note to clients.

Barkin, a former top executive at McKinsey, said the Fed can move rates up gradually because many firms don't think they can pass on higher costs to consumers and this is keeping inflation low.

Trade tariffs are making people more nervous, the Richmond Fed president said. Other reasons for caution are supply chain constraints, geopolitical instability, market volatility and the potential effects of higher interest rates, he said.

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"At least for now, though, businesses and consumers seem to be looking through these risks," Barkin said.