By Howard Schneider

WILMINGTON, North Carolina (Reuters) – The U.S. central bank’s fight to return inflation to its 2% target may take longer than expected and limit interest rate cuts, according to Richmond Federal Reserve President Thomas Barkin.

In an interview with Reuters, Barkin supported the recent half-percentage-point rate cut by the Fed and suggested another similar cut may occur by the year’s end, aligning with inflation’s decline.

However, he expressed concerns that inflation could remain stubborn next year, impacting the Fed’s ability to reduce rates to the anticipated ‘neutral’ levels. He noted that solid demand combined with tight labor markets complicates efforts to bring inflation down effectively.

Barkin stated, “I’m more concerned about inflation than I am about the labor market,” indicating potential challenges in achieving the final stages of lowering inflation. He acknowledged the risks of a ‘no-landing’ situation, where inflation persists without a clear path to a solution, rather than a smooth recovery.

The Fed recently reduced the benchmark interest rate to 4.75%-5.00%. Projections indicate rates might fall to around 2.9% by 2026. Barkin suggested that a modest rate cut could be reasonable if inflation and unemployment remain stable.

He emphasized that how the economy performs going into late 2025 is crucial for reaching neutral interest rates, citing factors such as immigration, demand for big-ticket items, and global risks as influential.

Barkin concluded that while he hopes inflation stabilizes soon, normalization of rates will depend on clear evidence that inflation has settled at the 2% target, remaining open-minded about the pace of potential reductions and future rate policies.

For the immediate future, he noted modest inflation risks and more significant unemployment concerns, but also highlighted ongoing wage pressures, indicating a need for recalibration of current policies.