MNI: Fed's Harker Endorses 'A Few More' 25bp Rate Hikes

A few more quarter-point increases this year should bring the Federal Reserve's benchmark overnight interest rate to a sufficiently high level to slow the economy and inflation, Philadelphia Fed President Patrick Harker said Thursday.

He continues to expect a soft landing for the U.S. economy, with unemployment topping out at 4.5% this year without a recession.

"I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed. In my view, hikes of 25 basis points will be appropriate going forward," he said in remarks prepared for the Main Line Chamber of Commerce meeting in Malvern, Penn. Harker is a voter on rates policy this year.

"At some point this year, I expect that the policy rate will be restrictive enough that we will hold rates in place to let monetary policy do its work. We are also shrinking our balance sheet, which is removing a significant amount of accommodation in and of itself."

ROSY FORECASTS

The FOMC raised the target fed funds rate to 4.25% to 4.5% in December and is expected to nudge them higher again on Feb. 1. The vast majority of FOMC officials penciled in another 75bps of hikes this year in December, and a couple of Fed officials this week expressed support for a quarter-point increase at the next meeting.

Harker sees higher rates bringing core inflation down to about 3.5% this year and 2.5% next year. GDP growth should fall to 1% this year before climbing back to trend at about 2% in 2024 and 2025, while "there is little evidence of a major downturn in the job market," he said.

"GDP growth will be modest, but I’m not forecasting a recession. The labor markets are simply too hot to indicate a significant downturn at this point," he said.

"Also in the rearview mirror, I expect, are the eye-popping inflation readings of 2022."