Patrick Harker, president of the Philadelphia Fed Bank, said the US Federal Reserve may be close to meeting the inflation mandate set to raise interest rates, but it may fail to meet the central bank̵7;s employment target to allow for a real rate hike. It may take a year or more.
After running higher this year because of the pandemic, inflation is likely to come closer to the Fed’s 2% target over the next few years, Harker said in an interview with Reuters on Thursday.
“We’ll see how this pans out over the next few months, but I think we’re pretty close to our inflation target of running, or have already achieved, averaging above 2% for some time so that we to average 2% inflation over the long term,” Harker said.
If the economy continues to recover as expected, it could potentially reach a point by 2023 where the Fed’s mandate for both inflation and maximum employment has been met, he said. He estimates the US unemployment rate will drop to about 4% by the end of next year, 3.8% by 2023, and 3.6% by the end of 2024.
“At that point I think the economy should be healthy enough to tolerate some small increases in the fed funds rate,” Harker said, adding that low interest rates could increase financial stability risks and hurt savers and people on fixed income. can.
But he emphasized that the central bank will not remove housing any time soon. Harker said the Fed is still adding housing even if it begins to reduce its bond purchases at the current pace of $120 billion a month.
Harker said closing those asset purchases too soon could give the Fed more “optionality” to respond to inflation next year, which is running well above the central bank’s target. “It is a risk worth monitoring,” he said, especially if some supply-side disruptions take a few years to resolve.
Harker said earlier this week that he supports reducing the Fed’s asset purchases as of November. He also said that the central bank may start raising interest rates in late 2022 or early 2023 depending on how the economy is doing.
Ethics review ‘appropriate’
Harker could vote as an option at the Fed’s monetary policy meetings next year unless a replacement is selected for Boston Fed Chairman Eric Rosengren, who announced his retirement earlier this week. , as did Dallas Fed Chairman Robert Kaplan.
Rosengren cited health reasons for his decision, but he and Kaplan were both facing questions about investment trades made in 2020 while the Fed took action to stabilize financial markets and the economy.
Fed Chairman Jerome Powell ordered a comprehensive review of the central bank’s guidelines and vowed to improve them. He also said this week that the Fed is investigating trading conducted by regional bank presidents to ensure 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 that taking a look at his own investments from last year had him wondering whether it might be time to update the rules. Some municipal bonds that they held for years were called off because of falling interest rates, meaning they were paid back before the bonds matured.
“The question that popped up in my head was ‘Should I own Municipal Bonds going forward?'” Harker said. “That’s why I think it’s important, I didn’t think about it 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 had not conflicted and that he and his wife were holding onto those holdings. will not do business.
“We serve the American people and the American people need to trust that we are purposeful 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 bring this into question, including our investments, we should strengthen those policies.”
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