The Federal Reserve should ‘skip’ a further increase in interest rates at its next rate-setting meeting on 13-14 June, according to Patrick Harker, president of the Federal Reserve Bank of Philadelphia. Opening an OMFIF and Philadelphia Fed meeting at the bank’s headquarters on 31 May, Harker laid down a policy of trying to bring back inflation to around 2% over a more extended period, rather than trying to ‘dramatically’ cut it and unduly harm the labour market.
In a Q&A session with Mark Sobel, OMFIF US chairman, Harker said he was in a ‘camp’ on the Federal Open Market Committee moving to the notion of tightening rates every other meeting rather than at successive sessions. ‘We don’t have to crush the economy’ to return to the Fed’s target of a 2% inflation rate over time, he said.
He favoured a ‘skip’ in the tightening cycle rather than a ‘pause’ which would imply a more prolonged halt to tightening. ‘We may have to do more [tightening] in subsequent meetings,’ he said, adding that the key to the anti-inflation campaign was ‘moving in the right direction over time’.
Harker was speaking shortly after the publication of job opening data by the US labour department showing demand for US workers rose unexpectedly in April. The US had 10.1m job vacancies on 30 April, up 358,000 from March – the latest in a string of statistics underlining the resilience of the US economy despite 10 consecutive interest rate rises at FOMC meetings over the last 15 months.
Harker emphasised he was speaking for himself rather than other FOMC members. He would be putting forward his interest rate views at the next meeting after taking account of payroll and unemployment data due on 2 June as well as the US consumer price index, to be published on 13 June. ‘The economy keeps heading along,’ he said, opining the US was not facing recession. Latest surveys showed some slackening of tight US labour conditions, he added. ‘It’s getting easier to hire.’
Harker said the Fed had to consider the fractured world economic and political position in view of the ‘incredible tragedy’ of the Russian invasion of Ukraine, as well as fragile social conditions in the US. ‘This adds to volatility… there could be a worse-case scenario. This adds to people’s angst.’
Latest data indicate consumer prices rising at between 4% and 5% – double the 2% target. Asked if the Fed could tolerate a rate of 3% to 4% over the next three to four years as part of a ‘kinder, gentler’ approach on inflation, where it was more sensitive to societal issues, Harker said the exact figures need to be reviewed with care. Prolonged inflation of 3% to 4% would cause great problems for people on low incomes, he stated.
Citing Philadelphia Fed research on social issues, Harker said questions such as the price of fuel and the cost of childcare were all supply-side factors affecting labour market conditions, with indirect effects on inflation. ‘It’s not just monetary policy. If they can’t get people to look after their kids, then [employees] won’t be able to work. It’s a supply-side issue… We can affect demand [through monetary policy] but the supply side is important.’
Mark Sobel, US chair of OMFIF, will be joined by Vincent Reinhart, chief economist at BNY Mellon, to analyse the outcome of the June FOMC meeting on 15 June. Register to attend here.