– Should Keep Raising Funds Rate in 25 Bp Steps to Over 5%; Nor Sure How High
– Will Get To Point in ‘23 When Rates ‘Restrictive Enough’
– FOMC Should ‘Proceed Cautiously’ Because Also Shrinking Balance Sheet
– Sees Inflation Progress Despite CPI, But ‘Going to Take Time’
By Steven K. Beckner
(MaceNews) – Patrick Harker, president of the Federal Reserve Bank of Philadelphia, said Tuesday that the Fed is approaching the end of interest rate hikes and nearing a sufficiently restrictive monetary policy stance to accomplish its goal of reducing inflation.
Harker, a voting member of the Fed’s rate-setting Federal Open Market Committee, said the FOMC is “not yet done” raising rates, but is “likely close.”
At some point this year, the federal funds rate will be ”restrictive enough” to put monetary policy on “hold,” he told the Union League of Philadelphia,
However, Harker said the funds rate needs to be pushed above 5% in 25 basis point increments, with the exact level to be determined by incoming data.
On a day when the Labor Department reported a surprisingly large January increase in consumer prices, Harker said he still believes the Fed is making progress in reducing inflation, but said it will “take some time” to get to the Fed’s 2% target.
His comments, which sounded somewhat less “hawkish” than those of some of his Fed colleagues, came on the heels of a Labor Department report that the consumer price index increased a worse than expected 0.5% in February or 6.4% from a year earlier.
Harker joined in a unanimous vote of Fed policymakers on Feb. 1 to raise the funds rate for an eighth time since leaving the zero lower bound last March. Continuing a deceleration of the pace of rate hikes begun in mid-December, the FOMC raised the funds rate just 25 basis points to a target range of 4.50% to 4.75%.
In so doing, the FOMC reiterated that “ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.” It added, “In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
Immediately after the meeting and again last week, Chair Jerome Powell said the process of disinflation has begun, but said the Fed has “more work to do” because tight labor markets are keeping upward pressure on wages and, in turn, service prices.
Harker, who was conspicuous in coming out early for reducing the size of rate hikes from 50 to 25 basis points ahead of the Feb. 1 meeting, sounded less aggressive about monetary tightening than some of his colleagues,
“Rates are now at a level that allow us to slow down and proceed cautiously, and to my mind, the days of us raising 75 basis points at a time have surely passed,” he said. “Just at the last meeting, I voted for a hike of 25 basis points — what some would call slow but actually is closer to cruising speed when it comes to tightening.”
“In my view, we are not done yet … but we are likely close,” Harker continued in prepared remarks.
“At some point this year, I expect that the policy rate will be restrictive enough that we will hold rates in place and let monetary policy do its work,” he added.
Harker said the simultaneous shrinking of the Fed’s balance sheet “is removing a significant amount of accommodation in and of itself.”
Elaborating in response to a question about what the FOMC is likely to do at its March 21-22 meeting, Harker endorsed raising the funds rate above 5% in 25 basis point steps, but didn’t say how much above 5% he thinks it will need to go.
“I do think … it’s pretty clear…we’re not done yet, we’ve got more work to do …,” Harker responded. “I think we need to maintain the 25 basis point path.”
However, Harker cautioned against moving too far, too fast with rate hikes.
“We’ve got to be a little cautious….not raise the federal funds rate too quickly because we’re also doing” (balance sheet reduction),” he warned.
Noting again that the FOMC has slowed the pace of rate hikes, Harker said “that’s important, because we are reaching a point where we will have done enough.”
“Exactly where that is we’re going to have to let the data dictate that,” he continued, “It’s going to be above 5% in the federal funds rate. How much above 5 … it’s going to depend a lot on what we’re seeing.
“And we continue to see good progress with inflation,” Harker maintained. “Today we have an inflation report. It was good in that the average is moving down, but not quickly, and one of the areas that I personally worry about is the food inflation number was still really high ….”
“Inflation is going to take some time to come down ….,” he went on. “I can’t tell you exactly what we’re going to do in March because we don’t know until we have the meeting, but I do think we need to continue to move above 5 at 25 bp increments for a while.”
Other Fed officials have sounded somewhat more eager to raise rates lately – even before the CPI report – in wake of very strong January job numbers.
At their December meeting, FOMC participants projected the funds rate will rise to a median 5.1% (a target range of 5.00% to 5.25%) by the end of 2023. Since then, some Fed officials have said they believe the funds rate will likely need to go higher than that. FOMC officials will be revising their rate projections at the March 21-22 meeting.
Earlier Tuesday, Dallas Fed President Lorie Logan, like Harker an FOMC voter, urged tightening enough to bring down inflation and keeping monetary policy restrictive to sustain downward pressure on inflation.
While she acknowledged risks of over-tightening, she said “the most important risk I see is that if we tighten too little, the economy will remain overheated and we will fail to keep inflation in check. That could trigger a self-fulfilling spiral of unanchored inflation expectations that would be very costly to stop.”
Logan said the FOMC “shouldn’t lock in on a peak interest rate or a precise path of rates,” but added, “we will need to continue gradually raising the fed funds rate until we see convincing evidence that inflation is on track to return to our 2% target in a sustainable and timely way.”
“The evidence I’m looking for to gain confidence in the inflation outlook includes some further and sustained improvement in the inflation statistics, as well as a clear change in the underlying factors—like the imbalance of aggregate supply and demand and resulting very tight labor market—that have been producing high inflation,” Logan said.
Logan also cautioned that financial conditions “need to be sufficiently restrictive to restore price stability” and said, “we must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions.”
“And even after we have enough evidence that we don’t need to raise rates at some future meeting, we’ll need to remain flexible and tighten further if changes in the economic outlook or financial conditions call for it,” she added.
Also Tuesday, Richmond Fed President Thomas Barkin put heavy emphasis on inflation risks in the conduct of monetary policy.
“(I)t feels to me like the risk is on the inflation side at this point rather than the economy side …,” Barkin said on Bloomberg TV. “Inflation is normalizing but it’s coming down slowly. I just think there’s gonna be a lot more inertia, a lot more persistence to inflation than maybe we’d all want.”
Before the CPI release, Fed Governor Michelle Bowman also struck a hawkish pose Monday.
“While we have seen modestly lower inflation readings in recent months, overall inflation remains high. Measures of core services inflation have been persistently elevated, and labor demand exceeds the supply of available workers, which is leading employers to increase wages in an effort to retain and attract workers,” she said. “The ongoing tightness in the labor market puts upward pressure on inflation, even if some components of inflation moderate due to improvements in supply-side factors.”
Bowman said she wants to see “consistent evidence that inflation remains on a downward path when considering further rate increases and at what point we will have achieved a sufficiently restrictive stance for the policy rate.”
“We are still far from achieving price stability, and I expect that it will be necessary to further tighten monetary policy to bring inflation down toward our goal,” she continued. “Doing so will likely lead to subdued growth in economic activity and some softening in labor market conditions.”