Philadelphia Federal Reserve President Patrick Harker said at the MBA Annual Conference in Philadelphia on Monday that he thinks interest rates can stay where they are if economic and financial conditions evolve as they have been.
"And so far, economic and financial conditions are evolving as I expected, perhaps even a tad better," Harker said.
The Fed has raised interest rates 11 times since March of last year, pushing the federal funds rate to a 22-year high of 5.25% to 5.5% in a bid to lower soaring inflation. And while the central bank's actions over the past 18 months to tame inflation and bring it to a 2% annual target have contributed to the current mortgage climate, disinflation is underway and the Fed's interest rate policy is still making its way through the economy, Harker said.
"It will continue with inflation dropping below 3% in 2024 and leveling out at our 2% target," Harker said. "Thereafter, however, there can be challenges in assessing the trend of disinflation. For example, September's CPI report came out modestly on the upside, driven by energy and housing.
"Let me be clear about two things," Harker continued. "First, I will not tolerate, and I believe my colleagues will not tolerate, a reacceleration of prices. But second, I do not want to overreact to the normal month-to-month variability of prices."
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Beyond the Fed's restrictive monetary policy, several outside factors have also helped push inflation down, Harker said. For example, this spring's banking turmoil amid the collapse of Silicon Valley Bank (SVB) and Signature Bank triggered tighter credit conditions that lingered six months later.
Similarly, turmoil in labor markets is likely to exert downward pressure – not just in the loss of overall economic activity, but in the immediate impact on consumer spending, Harker said. Moreover, the Oct. 1 restart of student loan payments following a more than three-year pause may impact spending equally.
"Striking auto workers, for example, are forgoing their usual wages," Harker said. "On top of all this, we can add the resumption of student loan payments. Now, again, we do not know what impact this will have on consumer spending and savings. But I do expect it will be impactful, if not significant.
"So against this backdrop, this backdrop of uncertainty, I believe that the prudent position is to be one where the policy rates can remain steady," Harker continued.
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Harker is optimistic that the Fed won't need to raise rates again, but he was less precise about how long rates will linger at their current level. As for future policy, he said he subscribed to the moniker "higher for longer."
"My expectation is that rates will need to stay high for a while," Harker said. "And while I really do not expect it, if inflation were to rebound, I know that I would not hesitate to support further rate increases, as our objective is to return inflation to the target rate."
While rates may stay higher for longer, the good news is that the economy is holding steady.
"I continue to see strong underpinnings for the economy overall," Harker said. "This economy is proving nothing if not to be resilient. I expect this to continue. GDP growth is outperforming estimates earlier this year. I expect GDP gains to continue through the end of 2023 before pulling back slightly in 2024. But, do not conflate a more moderate rate of GDP growth as contraction. Simply put, I do not anticipate a recession."
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