Harker's View on Inflation and Interest Rates
Federal Reserve President Patrick Harker, based in Philadelphia, commented on the ongoing inflation situation on Thursday. While he described the inflation rate's reduction as "disappointingly slow," he suggested that there might be little need for the U.S. central bank to aggressively increase interest rates to expedite the cooling process.
Monitoring Economic Conditions and Setting Policies
In a National Association for Business Economics webinar, Harker expressed his proactive stance in tracking evolving economic conditions. "I am closely monitoring incoming data, listening to our contacts and audiences, and evaluating economic conditions to assess whether additional tightening will be needed," he said. He also suggested that the central bank is near the point where it could maintain steady interest rates and allow monetary policy to handle the rest.
Fed's Battle Against High Inflation: A Historical View
Since March 2022, the Fed has been incrementally increasing borrowing costs in response to surging inflation. It has now fallen from last summer's high of 7% to over 4%—still twice the central bank's target of 2%. In early May, the Fed elevated its policy rate for the 10th time to a targeted range of 5.00%-5.25%. Policymakers have since indicated a potential pause in rate hikes during their June 13-14 meeting. This will enable them to gauge the impact of previous rate hikes and evaluate potential stressors in the banking sector.
The Impact of Rate Hikes and Economic Forecast
Harker noted some promising signs indicating that rate hikes are gradually cooling the economy, specifically impacting housing prices. However, he anticipates modest economic growth of less than 1% this year while expecting the unemployment rate to increase from the current 3.4% to approximately 4.4%. On the inflation front, Harker projects it will decrease to 3.5% this year and further down to 2.5% the following year, finally reaching the Fed's 2% goal by 2025.