By Jon Hurdle
NEWARK, Del. (MaceNews) – Philadelphia Federal Reserve President Patrick Harker predicted Monday that inflation will rise to the Fed’s 2% target but that interest rates should stay on hold for now until more economic data are collected.
In a speech to business leaders at the University of Delaware, Harker – a current voting member of the Federal Open Market Committee – also said the national economy is doing well, the labor market is showing strong job growth, and that unemployment is likely to stay below 4 percent for the next two years.
Noting that the 225,000 gain in nonfarm payrolls in January was significantly higher than the 175,000 monthly average during 2019, Harker said: “Overall, I think we are in pretty good shape,” he said.
He predicted that continuing low interest rates will allow many homeowners to refinance their mortgages, allowing them to spend more on consumer goods this year and next. He said the Philadelphia Fed has calculated that refinancing will boost consumer spending by $11.2 billion over the next two years.
“On an individual level, an average homeowner would have about $2,000 to spend in extra consumption within the first year after refinancing — a nice lift to almost any budget,” he said in prepared remarks.
But investment in plant, equipment and intellectual property is “lagging” because of uncertainty over fiscal policy, the global economic slowdown, trade uncertainties, and geopolitical tensions, he said.
Harker also endorsed the FOMC’s decision at its January meeting to leave the federal funds rate unchanged. “My own view right now is that we should hold steady for a while and watch how developments and the data unfold before taking any more action,” he said.
Noting that the 225,000 gain in nonfarm payrolls in January was significantly higher than the 175,000 monthly average during 2019, Harker said: “Overall, I think we are in pretty good shape.”
He forecast that the labor market will remain tight for some time because the population is ageing.
“The difficult recruiting environment is also one that is likely to stay with us for some time as demographic trends indicate that the workforce will continue to age and the labor force relative to the population will continue to decline,” Harker said.
To ease the labor market tightness, employers should consider the idea that not all jobs require a four-year college degree, Harker said. An increased supply of young people, even if they don’t have college degrees, could make it easier for employers to find workers, he said.
During a panel discussion, Harker stressed the limitations of monetary policy to respond to some economic conditions. Asked whether the Fed can respond to the current interruption in supply chains from China as a result of the coronavirus outbreak there, Harker said it cannot.
“If supply chains are interrupted, what does monetary policy do about it? How does changing the interest rate 25 basis points help? It doesn’t,” Harker said. “To be a central banker you need to have many, many doses of humility.”
In current economic conditions, central bankers also have little power to stimulate business investment, he said. “What is limiting business investment? Never do you hear the cost of capital, so what would a rate cut do? Nothing.”
But the Fed would have to consider a rate cut if there was a significant economic downtown, he said.
“If things got significantly worse, you would have to think about accommodation but I don’t think we’re there now,” he said.
The Fed can create some conditions for economic growth, but cannot regulate the labor market supply that many employers are now struggling with, given that the unemployment rate is so low, and forecast to stay that way.
But immigration could help if national policy allowed it to, he said.
“We need a sensible legal immigration policy because if we don’t have that, we will not achieve the kinds of growth that we seek,” he said.