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.