Fed's Barkin: Solid Growth and Inflation Decline, but Caution Remains

Remarks of Officials

Summary:

Despite a substantial decline in inflation, it has yet to fully reach the Federal Reserve's 2% target. As a result, monetary policy must maintain a degree of restrictiveness to ensure that inflation does not re-emerge.

On February 25, 2025, Tom Barkin, President of the Federal Reserve Bank of Richmond, delivered a speech detailing the following:

The economy is in a good place. Recession fears have dissipated. GDP grew 2.5 percent last year, a healthy level. Strong consumer spending, a rebound in business investment, and rising asset prices have collectively supported this growth. Over the last few years, we've seen the pandemic and geopolitical conflict expose the vulnerabilities associated with globalization. However, supply chain bottlenecks have gradually eased, and firms have adapted to the new market environment through productivity gains. These factors have enabled the economy to maintain stable growth.

Inflation has shown a clear downward trend but remains above the Fed's 2% target. The headline Personal Consumption Expenditures (PCE) index, the Fed's preferred inflation measure, has declined significantly from its peak but still lags behind the target. The January Consumer Price Index (CPI), which places a higher weight on housing costs, may have overstated the overall inflation level.

The labor market remains robust. Unemployment is at 4.0 percent, near most estimates of its natural rate. Firms continue to hire, wages are growing steadily, and the labor force participation rate is gradually recovering.

Businesses are leveraging automation and process optimization to enhance productivity, alleviating pressures from labor shortages. However, In the long run, the U.S. labor market may face structural challenges such as an aging population, declining birth rates, and uncertainties in immigration policy. These factors could lead to a reduction in future labor supply, thereby pushing up wage costs and exerting new upward pressure on inflation.

Monetary policy should remain cautious and avoid premature easing. With price levels still above target, the Federal Reserve needs to maintain a modestly restrictive stance to ensure that inflation does not rebound. Historical experience has shown that easing policy too early can allow inflation to resurge, thereby undermining economic stability.

The current economic environment remains fraught with uncertainties that could impact future inflation trends. Geopolitical conflicts, trade policy adjustments, changes in immigration policy, and volatility in energy markets all pose potential risks. In this context, the Fed must adopt a “wait-and-see” approach, closely monitoring economic data to ensure that policy adjustments align with the evolving economic landscape.

In summary, the Fed will continue to remain vigilant to avoid reigniting inflation through premature rate cuts. With solid economic growth, a strong labor market, and inflation trending downward but still requiring attention, maintaining a moderately restrictive monetary policy stance is prudent until there is greater confidence that inflation will sustainably return to the 2% target.

Fed's Barkin

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Alex

Economic

Forex

The Pound Sterling (GBP) rose 0.37% to 1.2669 after rebounding from a two-day low of 1.2605, as the US Dollar weakened due to falling US Treasury yields. Market sentiment turned negative following US President Trump’s renewed tariff threats on Canadian and Mexican goods. Weak US economic data also weighed on the Dollar, with the 10-year Treasury yield dropping 10 basis points to 4.30%. US home prices rose 4.5% year-over-year in December, slightly higher than November’s 4.3%. The Confederation of British Industry in the UK reported that retailers plan to cut investments due to weak spending and high prices. A Reuters poll suggests the Bank of England (BoE) will likely keep rates steady at 4.50% in March, possibly cutting to 4.25% in Q2. Traders now await comments from BoE’s chief economist, Huw Pill.

GBP/CHF – H4 Timeframe

The highlighted demand zone on GBP/CHF’s 4-hour timeframe chart is the result of a bullish SBR pattern, with confluences from the 61% Fibonacci retracement level, 200-period moving average support, and trendline support. An FVG near the demand area lends further credence to the bullish sentiment.

GBPCHF – H3 Timeframe

The 3-hour timeframe chart of GBP/CHF shows the SBR pattern in more detail, with the induced low visibly retracing before filling up the FVG area. The reaction from the confluence of the demand zone, the trendline support, and the 61% Fibonacci retracement level is expected to push prices to create a new higher high.

Analyst’s Expectations:

Direction: Bullish

Target- 1.14218

Invalidation- 1.12162

Source: ACTIONFOREX

To stay updated on all economic events of today, please check out our Economic calendar

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ECB

Remarks of Officials

Isabel Schnabel, Member of the Executive Board of the European Central Bank (ECB), spoke at the Bank of England Conference in London on February 25, 2025, as follows:

The global economic growth potential is undergoing a structural adjustment. In recent years, factors such as geopolitical fragmentation, climate change and labor shortages are having a profound impact on economic growth patterns. Whereas in the past the global economy suffered from a "savings glut", which led to low long-term interest rates, the current trend of widening fiscal deficits and central bank balance sheet normalization is driving a "bond glut", which in turn is raising long-term real interest rates. Current long-term real interest rates in the euro area are already much higher than in most of the period following the 2008 financial crisis, suggesting that growth may face new constraints and that the economic environment ahead will be different from that of the past decade.

High inflation risks remain, and the global economy has departed from the prolonged low-inflation environment of the past. The recent spike in inflation may have permanently altered consumer and business expectations, making it easier for businesses to pass on cost increases to consumers and thus exacerbating inflation stickiness. In addition, global supply chain adjustments, the trend towards de-globalization and uncertainty in energy markets could create long-term upward inflationary pressures.

Labor shortages coexist with structural changes. In recent years, the global balance between labor supply and demand has shifted, with some industries experiencing chronic labor shortages. Population ageing, changes in immigration policies and labor market adjustments brought about by technological change are likely to affect future job market conditions. In addition, the structural tightening of the labor market is still likely to exert long-term pressure on wages and the level of inflation, a trend that central banks will need to monitor closely.

Overall, the global economy is currently undergoing profound changes and central banks need to adapt to the new situation. The post-pandemic economic environment has been different from that of the past decade, and the rise in the level of long-term real interest rates is likely to be a persistent trend. Therefore, central banks need to be more cautious in adjusting their policies, keep a constant watch on the dynamics of the global market, and take appropriate measures when necessary to ensure the long-term stable development of the economy.

ECB's Schnabel

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FastBull Featured

Daily News

[Quick Facts]

Israel: Hamas faces three options—disarmament, extended ceasefire, or resumption of war.

Barkin: Maintaining moderately restrictive stance is reasonable.

Trump directs government to consider possible tariffs on copper.

Schnabel: Caution on rate cuts; neutral rate likely higher.

ECB's Stournaras: It is too early to discuss pausing cuts.

[News Details]

Israel: Hamas faces three options—disarmament, extended ceasefire, or resumption of war

On Tuesday, Israeli government officials stated that once the first phase of the ceasefire agreement in Gaza is completed, with all detained personnel transferred, Hamas will face three options. First, it can accept Israel's conditions, including disarmament and relinquishing administrative control over Gaza. Second, it can continue releasing detainees to extend the ceasefire. Third, it can end the ceasefire and resume full-scale war.

Barkin: Maintaining moderately restrictive stance is reasonable

Richmond Federal Reserve President Thomas Barkin emphasized that the U.S. economy is in good shape, with a solid labor market and the dissipation of recession fears. However, significant uncertainties persist, making it difficult to make major adjustments to monetary policy in the near term. Barkin highlighted the need to observe how these uncertainties evolve and how the economy reacts.

Barkin acknowledged that the U.S. economy has been making progress in suppressing inflation but warned of potential risks that could push prices upward. Factors such as changes in global supply chains, a declining U.S. population and labor force, and rising budget deficits due to an aging population and increased defense spending could potentially lead to a resurgence in inflation. If such a scenario materializes, the Federal Reserve may need to consider rate hikes to counteract rising prices. However, he cautioned that the outlook remains uncertain, and policymakers must remain vigilant. Barkin suggested that the U.S. central bank's benchmark policy rate should stay restrictive until it is more certain that inflation is returning to its 2% target.

Following three consecutive rate cuts in the second half of 2024, Federal Reserve officials have generally expressed caution regarding the timing of further rate cuts. They cited stubborn inflation data, a strong underlying economy, and uncertainties surrounding President Trump's economic policies as reasons to remain patient with further rate adjustments.

Trump directs government to consider possible tariffs on copper

In his latest move targeting global trade norms, President Donald Trump has ordered a new investigation into potential tariffs on copper imports, aiming to revitalize U.S. copper production. Copper is a critical material for electric vehicles, military hardware, semiconductors, and a wide range of consumer goods.

Trump signed a directive instructing Secretary of Commerce Lutnick to initiate a national security investigation under Section 232 of the Trade Expansion Act of 1962. The same legal provision was used during Trump's first term to impose a 25% global tariff on steel and aluminum.

A White House official stated that any potential tariff rates would be determined by the investigation, adding that Trump prefers tariffs over quotas. According to U.S. data, the countries most affected by potential U.S. copper tariffs would be Chile, Canada, and Mexico, which are the top suppliers of refined copper and copper products. The official also noted that forecasts based on demand for electric vehicles and artificial intelligence suggest a future copper shortage.

Schnabel: Caution on rate cuts; neutral rate likely higher

European Central Bank Executive Board member Isabel Schnabel has warned that the ECB should proceed cautiously with further interest rate cuts, as current borrowing costs may already be near a level that no longer restrains economic activity. She emphasized that the so-called neutral rate, which neither stimulates nor restricts growth, has likely increased in recent years. The Eurozone's economic stagnation does not necessarily indicate that monetary policy is still suppressing expansion. She has warned that the ECB should proceed cautiously with further interest rate cuts. The data show the degree of restriction has significantly diminished, to a point where policymakers can no longer confidently assert that monetary policy remains restrictive. She said, "I'm no longer sure whether it is still restrictive. What I'm saying is I'm no longer sure whether it is still restrictive."

ECB's Stournaras: It is too early to discuss pausing cuts

Yannis Stournaras, the Governor of the Bank of Greece and a member of the ECB Governing Council, stated on Tuesday that the ECB's monetary policy continues to restrain economic activity, necessitating further easing. "I don't think the next meeting is the appropriate time to discuss a pause in rate cuts. We are still in restrictive territory," he said. Given the current information, Stournaras expects interest rates to reach 2% by the fall of this year, which he believes could be the terminal rate.

Stournaras' remarks are a clear response to the recent calls from ECB Executive Board member Isabel Schnabel, who suggested that the timing to halt rate cuts may be near. However, Schnabel's view appears to be in the minority within the 26-member ECB Governing Council. As inflation continues to trend downward toward the 2% target and the Eurozone economy remains sluggish, most members support further policy easing.

[Today's Focus]

UTC+8 15:00 Germany March GfK Consumer Confidence Index

UTC+8 00:30 Speech by Bank of England Monetary Policy Committee Member Dhingra

UTC+8 01:00 Speech by Atlanta Fed President Raphael Bostic

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Cohen

Economic

Forex

The New Zealand Dollar (NZD) is facing slight downward pressure against the US Dollar (USD) and could dip further, though it’s unlikely to fall clearly below 0.5715. If it does break that support, reaching 0.5790 is doubtful. In the short term, analysts expected the NZD to move between 0.5735 and 0.5770, which it did—hitting both levels before closing at 0.5733, down 0.17%. The downward momentum has slightly increased, suggesting the NZD might edge lower today. However, any drop is expected to stay above 0.5715. This mild pressure will likely hold if the NZD remains below 0.5760, with minor resistance at 0.5745.

NZDUSD – D1 Timeframe

After breaking above the 50-day moving average, the price action on the daily timeframe chart of NZDUSD proceeded to overshoot the previous high, creating a new higher high in the process. The momentum from the breakout has waned, giving rise to the ongoing retracement move. The expectation is that the confluence region of the drop-base-rally demand zone and the 50-day moving average would provide adequate support for a bullish continuation.

NZDUSD – H4 Timeframe

The 4-hour timeframe chart of NZDUSD shows that the daily timeframe demand zone doubles as the trough of a bullish SBR pattern, with the presence of an FVG, 100-period moving average support, 76% Fibonacci retracement level support, and liquidity at the previously induced low. The expected outcome in this scenario is bullish, with an initial target at the BSL (Buy-Side Liquidity) at the recent high.

Analyst’s Expectations:

Direction: Bullish

Target- 0.57713

Invalidation- 0.56004

Source: ACTIONFOREX

To stay updated on all economic events of today, please check out our Economic calendar

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Owen Li

Commodity

WTI oil price fell below psychological $70 support on Tuesday and hit the lowest levels in two months.

Oil was down nearly 3% on renewed fears about the global economy and lower demand after the latest economic data showed that German economy contracted for the second straight quarter and US consumer confidence declined at the fastest pace since mid-2021.

Strong concerns among investors were also fueled by US tariffs on imports, as President Trump signaled that initially delayed tariffs on imports from Canada and Mexico, will be implemented according to the schedule – at the beginning of next month.

Tariffs on China’s goods imports further contribute to negative outlook, as this would directly fuel inflation, while consequences of trade war would be significant.

Negative fundamentals continue to sour the sentiment and raise pressure on oil prices.

Sustained break below $70/$69.90 supports (psychological / Fibo 76.4% of $66.98/$79.35 rally) to further firm bearish stance and risk dip towards weekly base at $67.00/66.30 zone (Oct/Dec 2024).

Broken $70 zone reverted to solid resistance which should ideally cap.

Res: 69.79; 70.00; 70.83; 71.44
Sup: 68.44; 67.70; 66.98; 66.54

Source: ACTIONFOREX

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Glendon

Economic

The United States has been running fiscal deficits for decades, spending more than it earns in revenue. This practice has become a defining feature of the nation’s economic policy, sparking debates about sustainability, economic growth, and the burden on future generations. But how long has the U.S. been in the red, and what does it mean for the economy? Let’s take a closer look.

A Brief History of U.S. Fiscal Deficits

The U.S. federal government has run fiscal deficits for most of its modern history. While surpluses have occurred occasionally, they are the exception rather than the rule. Here’s a timeline of key moments:

Early Years (18th–19th Century): The U.S. often ran deficits during wars, such as the Revolutionary War and the Civil War, but returned to surpluses during peacetime.

The Great Depression (1930s): Deficit spending became a tool for economic recovery under President Franklin D. Roosevelt’s New Deal programs.

Post-World War II (1940s–1970s): Deficits were common, driven by Cold War military spending and social programs like Medicare and Medicaid.

The 1980s–1990s: Tax cuts under President Reagan and increased defense spending led to large deficits, though the Clinton administration achieved a brief surplus in the late 1990s.

21st Century: The 2008 financial crisis, the COVID-19 pandemic, and tax cuts under Presidents Bush, Obama, and Trump have fueled record-breaking deficits.

Why Does the U.S. Run Deficits?

Fiscal deficits occur when government spending exceeds revenue, and the U.S. has relied on this approach for several reasons:

Economic Stimulus: During recessions, deficit spending can boost economic activity by funding infrastructure projects, unemployment benefits, and other programs.

Wars and Defense: Military conflicts, from World War II to the War on Terror, have required significant spending.

Social Programs: Programs like Social Security, Medicare, and Medicaid are costly but politically popular.

Tax Cuts: Reductions in tax rates, such as those in 2001 and 2017, have reduced government revenue.

Political Challenges: Raising taxes or cutting spending is often unpopular, making deficits an easier short-term solution.

The Impact of Persistent Deficits

While deficits can stimulate growth in the short term, persistent deficits have long-term consequences:

National Debt: Chronic deficits contribute to the national debt, which now exceeds $34 trillion.

Interest Payments: As debt grows, so do interest payments, diverting funds from other priorities like education or infrastructure.

Inflation Risk: Excessive borrowing can lead to inflation if not managed carefully.

Future Generations: High debt levels may burden future taxpayers, limiting their economic opportunities.

Can the U.S. Sustain Its Deficits?

The U.S. has maintained deficits for so long because of its unique position in the global economy. The dollar’s status as the world’s reserve currency allows the U.S. to borrow at low interest rates. However, this advantage isn’t guaranteed forever. Rising debt levels and political gridlock over fiscal policy could eventually undermine confidence in the U.S. economy.

Conclusion

The U.S. has been running fiscal deficits for most of its modern history, using them as a tool to fund wars, stimulate growth, and support social programs. While deficits have played a crucial role in shaping the nation’s economy, their long-term sustainability remains a pressing question. As policymakers grapple with these challenges, understanding the history and impact of deficits is essential for making informed decisions about the future.

To stay updated on all economic events of today, please check out our Economic calendar

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