By Howard Schneider
WASHINGTON (Reuters) -Hotter-than-expected inflation in January shows that the United States' path back to 2% inflation "may be a bumpy one," Fed Vice Chair for Supervision Michael Barr said on Wednesday, adding it was too early to be assured price stability will be restored without a significant blow to jobs or economic growth.
"It's very early to say whether we end up with a soft landing or not," Barr said, referring to the Fed's hoped-for outcome where inflation returns to the Fed's target without a large rise in the unemployment rate.
"I'd be very careful about where we are in that process," with the Fed facing a "difficult" decision on how long to maintain the target rate of interest at the current 5.25% to 5.5% range, Barr said at a National Association for Business Economics conference.
The Fed is "confident we are on a path to 2% inflation," Barr said in a prepared speech at the event. But a recent report showing prices rose faster than anticipated in January, "is a reminder that the path back to 2% inflation may be a bumpy one."
Consumer prices rose at a yearly 3.1% rate in January, with an underlying measure of core inflation measuring 3.9%, the same as the month before, with rising shelter prices driving the increase.
"We need to see continued good data before we can begin the process of reducing the federal funds rate," Barr said, adding he backed the "careful approach" to cutting rates advocated by Chair Jerome Powell and other Fed policymakers.
The Fed held rates steady at its last meeting in a range between 5.25% and 5.5%, with rate cuts expected to begin some time after an upcoming meeting in March.
But Fed officials have said that will depend on upcoming data confirming that inflation continues to decline, and does not either begin to accelerate or get stalled at a level above the central bank's target.
"It is a difficult set of judgments to make in the current context because there are no clear historical parallels," given the current situation's roots in the coronavirus pandemic, he said.
Barr, who oversees the Fed's supervision and regulation of banks, downplayed some current concerns. He argued that while certain commercial office buildings may drop in value and pose problems for the banks with loans on those buildings, the issue would play out over time and would not pose an "acute" problem for the financial sector.
Referring to the failure nearly a year ago of Silicon Valley Bank, and the fears of a broader credit crunch that followed it, Barr said the financial system was "in much better shape than it was last spring."
Citing similar concerns around recent troubles at the New York Community Bancorp (NYSE:NYCB), Barr said, "a single bank missing its revenue expectations and increasing its provisioning does not change the fact that the overall banking system is strong."
"We see no signs of liquidity problems across the system," Barr said.
Regarding the Fed's balance sheet, Barr said the Fed was monitoring markets carefully as it continues to draw down its asset holdings, to be sure that banks can continue to easily access reserves.
Detailed talks about the future of the balance sheet would commence "soon," Barr said.