Why One Fed Official Is Ready to Stop Raising Rates
‘The workings of the economy cannot be rushed,’ says Philadelphia Fed President Patrick Harker
The Federal Reserve should extend its pause on interest-rate increases because of growing evidence that higher borrowing costs will slow the economy despite recent signs of hiring and spending strength, a top central bank official said.
Philadelphia Fed President Patrick Harker in a Tuesday interview said he thinks the central bank can likely wait until early next year to decide whether rapid rate increases over the past 20 months have done enough to keep inflation heading lower.
“This is a time where we just sit for a little bit. It may be for an extended period; it may not. But let’s see how things evolve over the next few months,” said Harker, who has a vote on interest-rate policy this year.
While recent economic data have been surprisingly brisk, Harker said anecdotal, on-the-ground reports from business “contact after contact after contact is that things seem to be slowing down.”
For example, bankers have reported more business loans are coming due and will need to be renewed at much higher rates. “They’re concerned that some of those businesses and their business models will not be able to survive those higher rates,” said Harker, a former university president.
The Fed most recently raised rates in July to a range between 5.25% and 5.5%, a 22-year high. Several officials have signaled over the past week that they are comfortable holding rates steady at their Oct. 31-Nov. 1 meeting. That would extend a pause in rate rises from their September meeting.
The Fed has also pared its $8 trillion asset portfolio by $1 trillion over the past year as it allows holdings of Treasury and mortgage-backed securities to mature without replacing them. Shrinking those holdings provides an additional form of tightening policy because, when the U.S. Treasury rolls over its debt, it must find a new buyer of the securities.
‘We are doing quite a lot’
Harker highlighted the lagged effects of tighter monetary policy while addressing a national mortgage bankers convention in Philadelphia on Monday. “We did a lot, and we did it very fast…The workings of the economy cannot be rushed,” he said. “By doing nothing, we are doing something. And I think we are doing quite a lot.”
Harker has never dissented at a rate-setting meeting during turns as a voter in 2017, 2020 and this year. On Tuesday, he said the decision to support the July rate increase was a “close call.” He would need to see a “stark turn” in economic data—and in particular, signs that inflation was reaccelerating—to pivot back to favoring rate increases, he said.
A blowout September employment report from the Labor Department earlier this month and a strong retail-sales report from the Commerce Department on Tuesday have extended a run of firmer-than-expected economic figures.
At the same time, measures of underlying inflation have slowed markedly since June. Core prices, which exclude volatile food and energy items, rose at a 3% six-month annualized rate in August, down from 4.8% over the previous six-month period, according to the Commerce Department.
“If inflation were moving up in a sustained way, then I would behave very differently than if I saw just continuing strength in, say, retail sales for another month or so,” Harker said.
Tighter financial conditions
Harker said he took added comfort that the Fed had done enough to slow the economy and bring down inflation because of a recent run-up in long-term bond yields. The 10-year Treasury yield closed Tuesday at a new 16-year high of 4.846%.
Higher borrowing costs traditionally weaken investment and spending, a dynamic that is reinforced when higher rates also weigh on stocks and other asset prices. “Anything that would reduce financial accommodation will, in essence, be doing some of the work of monetary policy, for sure,” Harker said.
Harker said it would be appropriate for the Fed to consider lowering interest rates once inflation is “within a reasonable distance” of the central bank’s 2% target.
“We’re not there yet, but we believe in lags,” he said. “So if we get into the range of, I don’t know, let’s call it 2.5%, [and] we’re continuing to move down, then something like that would at least have me considering whether or not it’s time for rates to start coming down.”
Harker also said he would favor beginning conversations around how and whether the central bank might eventually slow the pace of runoff of its asset portfolio. The central bank is allowing up to $60 billion in Treasury securities to mature every month, which is twice as fast as occurred in late 2018 and early 2019, the last time the central bank was paring its holdings.
After the Covid-19 pandemic spread in March 2020, the Fed purchased trillions of dollars of securities to stabilize financial markets and, later, to provide extra stimulus once interest rates had been lowered to near zero. Officials want to shrink those holdings, which will eventually drain bank deposits known as reserves from financial markets. But they aren’t sure when reserves might fall to levels low enough that banks will compete for them, which could drive up overnight lending rates, something that occurred in 2019.