– Philadelphia Federal Reserve President Patrick Harker believes interest rate hikes should be stopped as disinflation is occurring.
– Harker predicts that inflation will drop below 3% in 2024 and then level at the 2% target.
– As a voting member of the Federal Open Market Committee (FOMC), Harker’s words hold significance for upcoming rate-setting decisions.
– The central bank has been raising interest rates to combat inflation, with one more hike expected by the end of the year.
– Despite elevated inflation numbers, there has been a decrease compared to last year.
– Harker acknowledges the challenges of assessing disinflation trends and will not overreact to short-term price variability.
– Harker believes interest rates will need to stay high for an extended period.
– Harker notes that outside factors, such as banking turmoil and tighter credit conditions, are further pushing down on inflation.
– Harker is optimistic about the economy, expecting GDP growth to continue through 2023 and only slightly decrease in 2024.
– Unemployment is expected to increase slightly over the next year but remain in line with the natural rate of unemployment.
Philadelphia Federal Reserve President Patrick Harker advocated for stopping interest rate hikes, noting that disinflation is under way.
“I believe that we are at the point where we can hold rates where they are,” Harker said at the 2023 Mortgage Bankers Association Annual Convention & Expo in Philadelphia on Monday. “Disinflation is under way, labor markets are coming into better balance, and economic activity continues to be resilient…By doing nothing, we are doing something. And I think we are doing quite a lot.”
He told conference attendees that inflation is pegged to drop below 3% in 2024 and level at the 2% target thereafter.
As a voting member this year on the rate-setting Federal Open Market Committee (FOMC), his words carry weight as policymakers contemplate their moves for the upcoming meeting on Oct. 31.
The central bank has raised interest rates in the 5.25% to 5.5% range since it started its campaign to tame inflation in March 2022. Policymakers foresee one more hike by the end of the year. The bulk of central bank officials expect to have interest rates finishing the year at around 5.6%.
While the headline personal consumption expenditure (PCE) inflation remained elevated in August at 3.5% year over year, it is down 3 percentage points from this time last year.
The PCE price index excluding food and energy — the Fed’s preferred measure — increased by 0.1% in August, marking its smallest monthly increase since 2020.
September’s consumer price index (CPI) rose 3.7% year over year, holding steady with August’s annual gain and above economists’ expectations.
Harker noted there can be challenges in assessing the trends in disinflation and emphasized that he will not overreact to the normal month-to-month variability of prices.
As for future policy, Harker emphasized that rates will need to stay higher for a while.
“You may have noticed that I didn’t tell you how long rates will need to stay high (…) I can tell you I do subscribe the moniker, ‘higher for longer.’”
Harker noted outside factors that are working in parallel to further push down on inflation include the spring banking turmoil, tighter credit conditions and the resumption of student loan payments.
Strong underpinnings for the economy
Harker made clear his views on the economy – he does not anticipate a recession.
“GDP growth is outperforming estimates from earlier this year. I do expect GDP gains to continue through the end of 2023, before pulling back slightly in 2024. But do not conflate a more moderate rate of GDP growth as a contraction,” Harker said.
He expected unemployment to end the year at about 4%, above the current 3.8%. That rate is anticipated to increase slowly over the next year to peak around 4.5% before heading toward 4% in 2025.
Harker, however, emphasized he does not expect mass layoffs across the country.
“This path would put the unemployment figure in line with the natural rate of unemployment, or that theoretical level where labor market conditions support stable 2% inflation,” Harker said.
Property Chomp’s Take:
During the 2023 Mortgage Bankers Association Annual Convention & Expo in Philadelphia, Harker expressed his belief that interest rate hikes should be put on hold. He stated that disinflation is currently underway and that labor markets are improving, while economic activity remains resilient. Harker argues that by maintaining the status quo and not raising interest rates, the Federal Reserve is making a significant decision.
As a voting member of the Federal Open Market Committee (FOMC), Harker’s statements hold weight as policymakers prepare for their upcoming meeting on October 31st. The central bank has been gradually raising interest rates since March 2022, aiming to control inflation. While most officials anticipate one more hike by the end of the year, Harker’s comments suggest that he believes rates should remain unchanged.
Harker predicts that inflation will drop below 3% in 2024 and stabilize at the Federal Reserve’s target of 2% thereafter. These projections factor into his argument for holding rates steady. Despite the headline personal consumption expenditure (PCE) inflation remaining elevated at 3.5% in August, it has decreased by 3 percentage points compared to the previous year. Additionally, the Fed’s preferred measure, the PCE price index excluding food and energy, only increased by 0.1% in August, the smallest monthly increase since 2020.
Although the consumer price index (CPI) for September showed a 3.7% year-over-year increase, Harker emphasizes the need to consider the broader trends and not overreact to short-term fluctuations in prices. He also highlights external factors such as banking turmoil, tighter credit conditions, and the resumption of student loan payments that are likely to contribute to further decreases in inflation.
Harker’s remarks also shed light on his positive outlook for the economy, as he does not anticipate a recession. He expects GDP growth to continue surpassing earlier estimates throughout 2023 before experiencing a slight pullback in 2024. However, he clarifies that a more moderate rate of GDP growth should not be mistaken for a contraction. Harker forecasts the unemployment rate to end the year around 4%, slightly higher than the current 3.8%. He anticipates a gradual increase in unemployment over the next year, peaking at around 4.5% before declining towards 4% in 2025.
Despite these projections, Harker reassures that he does not expect widespread layoffs nationwide. Instead, he believes this trajectory aligns with the natural rate of unemployment, which supports stable 2% inflation.
In conclusion, Harker’s comments advocating for a pause in interest rate hikes due to disinflation and positive economic indicators will play a crucial role in shaping the Federal Reserve’s decisions. As policymakers convene at the end of October, their choices will influence the trajectory of the economy and determine whether rates will remain unchanged or increase.