–Harker Q&A: Does Not See FOMC Cutting Rates as Soon as March, But Maybe in May
By Steven K. Beckner
(MaceNews) – Federal Reserve Vice Chairman Philip Jefferson said Thursday that the Fed must be “careful” and “nimble” in charting the course of monetary policy in coming months, but gave no hint of when he thinks the Fed’s policymaking Federal Open Market Committee should start cutting short-term interest rates.
Jefferson did indicate, however, that he does not favor early monetary easing. He referred to cutting the federal funds rate from its current 5.25% to 5.50% target “later this year,” although he also allowed for the possibility of “easing sooner” if the inflation data permit.
Philadelphia Federal Reserve Bank President Patrick Harker, meanwhile, sounded less “dovish” than usual, saying he wants to see more convincing evidence that inflation is headed down to the Fed’s 2% target and warning that cutting rates too soon could “reignite inflation.”
Echoing what Fed Chairman Jerome Powell said following the FOMC’s Jan. 30-31 meeting, Jefferson said the FOMC has moved the federal funds rate “well into restrictive territory” and said it is “likely at its peak for this tightening cycle.”
“If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” he told the Peterson Institute for International Economics.
But Jefferson refused to be pinned down when asked whether he would need to see a weakening of the economy or employment to support cutting rates. “I don’t think it’s necessarily one thing we would have to see before we think about cutting…”
Harker was the first FOMC voter to say last summer that the Fed had raised the funds rate enough following 525 basis points of tightening, but speaking at the University of Delaware Thursday, he was not yet ready to make a similar pronouncement about reversing those rate hikes. On the contrary, he echoed others who have warned against cutting rates too soon.
In response to questions, Harker saw no need to cut rates soon, but at the same time suggested that the FOMC could do so by mid-year.
Asked when the Fed will cut rates, he responded, “Not at this point. I think we can hold here…” He noted that the Fed “will continue to tighten” as lower inflation pushes up t5he real funds rate.
“That’s the right policy,” he continued. “Let’s not rush this.”
However, as the questioning about the timing of rate cuts continued, Harker blurted, “I think we’re close,” he said. “Just give us a couple of meetings.”
Harker said he does not foresee the FOMC starting to cut rates as soon as its March 19-20 meeting, but said May 1 is “possible …. . I wouldn’t take it off the table.”
Over the longer run, Harker estimated the neutral funds rate is “2% to 2 ½%” and said, “We’re definitely heading back in that direction.”
Whenever the FOMC starts cutting rates, Harker said, “I don’t like the idea of doing a little bit of reduction now, a little bit of reduction later … . What I want to do … on a steady, slow reduction.” He stressed that the Fed needs to ‘end the uncertainty.”
Asked whether he meant the FOMC should cut rates moderately each quarter or at each meeting, Harker answered vaguely in the affirmative.
In other comments, Harker said the Fed is keeping a wary eye on ebullient financial markets..
“What we’re trying to do is tighten financial conditions …. so if markets are loosening too much vis a vis where we want to be then, yeah, we have to take that into account.”
The officials’ comments come three weeks after the FOMC kept the federal funds rate target unchanged in a 5.25% to 5.50% target range, but dropped its tightening bias in favor of more neutral policy guidance in apparent preparation for eventual rate cuts. FOMC participants had previously projected 75 basis points of rate cuts this year to a median 4.6%.
At the same time, the FOMC made clear it is in no hurry to ease. Powell told reporters the funds rate is “likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.” But he said “the Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”
Since then, inflation indicators have come in disappointingly high, and there have been some indications of flagging economic momentum, calling into question whether the Fed is succeeding in its goal of achieving a “soft landing.”.
Last week, the Labor Department said its Consumer Price Index rose a faster than expected 0.3% in January. The CPI’s 3.1% year-over-year increase was an improvement compared to December, but not as good as hoped. The core CPI did worse, rising 0.4% in January and 3.9% from a year earlier.
A January reading on the Fed’s preferred inflation gauge, the price index for personal consumption expenditures, won’t be released until next week, but it too has been trending lower. In December, the PCE rose a faster 0.2%, but it was up just 2.6% from a year earlier – first time since March 2021 that it had been below 3%. The core PCE was up 2.9% year-over-year – down from 3.2% in November.
Jefferson, who became vice chairman last September, sounded much like his colleagues in arguing for a cautious approach to rate cutting.
Drawing on lessons from past rate cycles, he observed that “policymakers need to remain vigilant and nimble, in case of adverse shocks hitting the economy, and that policymakers need some good luck.”
Jefferson warned, “We always need to keep in mind the danger of easing too much in response to improvements in the inflation picture. Excessive easing can lead to a stalling or reversal in progress in restoring price stability.”
“Our strong actions have moved our policy rate well into restrictive territory, and our restrictive stance of monetary policy is putting downward pressure on economic activity and inflation,” he said. “If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back our policy restraint later this year.”
In the absence of unanticipated exogenous shocks, policymakers can weigh multiple factors, including keeping policy restrictive enough to tamp down a possible resurgence of inflation due to the strength of aggregate demand or easing sooner to avoid an undue increase in unemployment,” he added.
Responding to questions, Jefferson said, “Things change quickly in ways we don’t anticipate … . That’s the value in us proceeding carefully as we think about the stance of monetary policy.”
Jefferson said that, “At each meeting we look at the available data and try to assess the risks, using our best forecast, doing that in real time.”
“Policy always has to be vigilant and nimble,” he reiterated.
Asked whether he would need to see a weakening economic activity before he would support starting to cut rates, Jefferson replied, “I don’t think it’s necessarily one thing we would have to see before we think about cutting,,..”
“We want to see evidence that inflation is sustainably at our target level, or going toward our target level,” he continued. “We want the economy to remain as strong as possible.”
“We’re not just looking at one indicator to determine whether or not that’s the time to start (easing),” Jefferson went on. “There would have to be a body of evidence about the macro economic performance that would then weigh in the direction of (deciding if) now is the time.”
Like other Fed officials he welcomed the downtrend in inflation in recent months and noted this has been accomplished with relatively little economic “pain.” He sounded hopeful for a so-called “soft landing.”
“The fact that the unemployment rate and layoffs have remained low in the U.S. economy over the past year amid disinflation suggests that there is a path to restoring price stability without the kind of substantial increase in unemployment that has often accompanied significant tightening cycles,” he said.
This disinflationary expansion has been accomplished, according to Jefferson, through a combination of “both the unwinding of pandemic-related supply and demand distortions in the economy as well as restrictive monetary policy, which has cooled strong demand and given the supply side of the economy time to catch up.”
But Jefferson warned, “the disinflation process is likely to be bumpy.”
He cited “three key risks:”
– 1.) “Consumer spending could be even more resilient than I currently expect it to be, which could cause progress on inflation to stall.”
– 2.) “Employment could weaken as the factors supporting economic growth fade.
– 3.) “Geopolitical risks could remain elevated, and a widening of the conflict in the Middle East could have greater effects on commodity prices, such as oil, and on global financial markets.”
Harker, who is usually thought of as being on the dovish end of the policy spectrum, said he is not yet ready to start cutting interest rates. For now, somewhat surprisingly, he sees the greatest risk as easing too soon.
The non-voter warned, “As progress can be bumpy – and uneven at times – it is important that we see more evidence, allowing us to look past the vagaries of monthly data and ensure we continue on the right path …. .”
“I believe that we may be in the position to see the rate decrease this year,” he said. “But I would caution anyone from looking for it right now and right away. We have time to get this right, as we must. ”
Harker said he “would characterize my stance at the moment as the old, oft-used adage: ‘Trust but verify.’”
“I certainly have confidence that monetary policy is working as it should – and the trend lines on disinflation only add to that – but I’m not quite yet at the “verified” moment,” he continued. “And what I am doing in verifying is compiling more evidence.”
Harker acknowledged that “the disinflation trend has picked up the pace,” but he added, “I want to make sure that we are seeing disinflation across goods and services.”
“I find our greatest economic risk comes from acting to lower the rate too early, lest we reignite inflation and see the work of the past two years unwind before our eyes,” Harker said.
“I do believe we may be near the point where we can adjust the policy rate downward,” he went on. “But when we will actually arrive at that point, I cannot yet say … .”
““Just like last summer, when I was a voting member of the FOMC and I signaled my belief early that it was time to hold rates steady, I will signal my belief that we’re ready for a rate decrease when all the data — both the hard and the soft — give me that signal.”
Harker said the economy is doing well, but said the Fed must proceed cautiously.
“Though we’ve been bounced around by inflation’s potholes, our careful and steady approach to monetary policy has kept the engine running smoothly and the tires of our economy on the ground,” he said. “Our actions thus far have seen us progress to our destination without the broader economy sliding into a roadside ditch.
“But obviously, we can’t take our eyes off the road,” he continued. “We want to get to our destination without any warning lights going off or tires going flat. And at this moment, the indications are that we can do that — but only if we stay focused and controlled with our hands on the wheel.”
“We can’t go too heavy on the gas too soon, lest we lose control or pass our exit completely and have to reroute.,” he added.
Jefferson and Harker are just the latest in a series of Fed officials who, since the FOMC meeting, have talked about “risk management.” Officials have spoken both about the risk of cutting rates too soon and too late, but minutes of the meeting say, “Most participants noted the risks of moving too quickly to ease the stance of policy and emphasized the importance of carefully assessing incoming data in judging whether inflation is moving down sustainably to 2%.”
Only “a couple” officials “pointed to downside risks to the economy associated with maintaining an overly restrictive stance for too long,” according to the minutes.
Three other officials are scheduled to speak Thursday. Last week, several others made comments. The overall message has been that the Fed will need to proceed cautiously toward making monetary policy less restrictive, but cannot wait too long to start cutting interest rates.
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This story was updated with Philly Fed’s Harker Q&A at 5:10p ET
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