Exclusive-Fed's Harker says economy close to achieving inflation goal
for rate hikes
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[October 02, 2021] By
Jonnelle Marte
(Reuters) - The U.S. Federal Reserve may be
close to meeting the inflation mandate set for raising interest rates,
Philadelphia Fed Bank President Patrick Harker said, but it may be a
year or longer before the central bank's employment goal is met to allow
for an actual rate increase.
After running high this year because of the pandemic, inflation is
likely to come down closer to the Fed's 2% target over the next couple
of years, Harker said in an interview with Reuters on Thursday.
"We'll see how it pans out over the next couple of months, but I think
we're pretty close to, or already have, achieved our inflation goal of
running, averaging above 2% for a while so we can average over the
longer-run 2% inflation," Harker said.
If the economy continues to improve as expected, it could potentially
reach a point as soon as 2023 where the Fed's mandates for both
inflation and maximum employment have been met, he said. His forecast is
for the U.S. unemployment rate to drop to about 4% by the end of next
year, 3.8% by 2023 and 3.6% by the end of 2024.
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"At that point I think the economy should be healthy enough to tolerate
some small increases in the Fed funds rate," said Harker, adding that
low interest rates can increase financial stability risks and hurt
savers and people on fixed incomes.
But he emphasized that the central bank will not be removing
accommodation anytime soon. The Fed will still be adding accommodation
even after it starts to reduce its bond purchases from the current pace
of $120 billion a month, just at a slower rate, Harker said.
Winding down those asset purchases soon could give the Fed more "optionality"
next year for responding to inflation that continues to run above the
central bank's target, Harker said. "That is a risk worth monitoring,"
he said, especially if some supply side disruptions take a few years to
be resolved.
Harker said earlier this week that he supports tapering the Fed's asset
purchases as soon as November. He also said the central bank could start
increasing interest rates in late 2022 or early 2023, based on how the
economy is doing.
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The Federal Reserve building is set against a blue sky in
Washington, U.S., May 1, 2020. REUTERS/Kevin Lamarque/File Photo
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ETHICS REVIEW 'APPROPRIATE'
Harker may vote next year as an alternate in the Fed's monetary policy meetings
until a replacement is chosen for Boston Fed President Eric Rosengren, who
announced his retirement earlier this week, as did Dallas Fed President Robert
Kaplan.
Rosengren cited health reasons for his decision but both he and Kaplan were
facing questions about investment trades they made in 2020 while the Fed took
actions to stabilize financial markets and the economy.
Fed Chair Jerome Powell ordered a broad review of the central bank's guidelines
and vowed to improve them. He also said this week that the Fed is examining the
trading done by regional bank presidents to make sure it was legal and in line
with current policies.
Harker said he welcomes the review of the ethics rules, calling it "timely and
appropriate."
Harker said a look at his own investments from last year made him think about
whether it may be time to update the rules. Some municipal bonds that he owned
for years were called because of the drop in interest rates, meaning he was paid
back before the bonds matured.
"In my mind it raised the question 'should I own municipal bonds going
forward?'" said Harker. "This is why I think this is important, I hadn't thought
about that before."
Powell shared a similar concern after last week's policy meeting, saying that he
asked the ethics office to review his municipal investments to confirm that they
did not create a conflict and that he and his wife will not trade on those
holdings.
"We serve the American people and the American people need to trust that we are
objective and have their best interests at heart," said Harker, who was tapped
to run the Philadelphia Fed in 2015. "That said, if there are things that would
bring that into question, including our investments, then we should strengthen
those policies."
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(Reporting by Jonnelle Marte; Edited by Dan Burns and Andrea Ricci)
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