MNI: Fed's Harker Expects To Keep Raising Rates 'For A While'

Philadelphia Fed President Patrick Harker on Thursday said he expects overnight interest rates to be well above 4% by December and the central bank to keep raising rates "for a while" to combat soaring inflation.

"Given our frankly disappointing lack of progress on curtailing inflation, I expect we will be well above 4% by the end of the year," he said in remarks prepared for the Greater Vineland Chamber of Commerce in New Jersey. "We are going to keep raising rates for a while."

Annualized consumer inflation came in at 8.2% in September, way above the Fed's 2% target, he noted. Inflation is "widespread throughout the economy" and health care premiums are set for a hefty rise next year after providers suffered large losses this year.

"Sometime next year, we are going to stop hiking rates. At that point, I think we should hold at a restrictive rate for a while to let monetary policy do its work. It will take a while for the higher cost of capital to work its way through the economy," Harker said. (See MNI: Ex-Officials Now See Funds Rate Peak at 5% Or Higher)

DEMAND SIDE

The Fed needs to see "continued movement toward 2% core inflation," Harker said. "We also need to pay attention to the distribution of inflation, making sure it’s falling across a wide spectrum of goods and services throughout the economy."

While the Fed can do little to solve supply constraints, it can tamp down demand, he added, noting that labor demand remains hot.

Tighter monetary policy will likely restrain growth, resulting in flat GDP numbers for 2022, 1.5% growth in 2023, and around 2% growth in 2024, he said. The unemployment rate should peak next year at 4.5% then edge down to 4% in 2024, "which suggests that even as we tighten monetary policy, labor markets will stay quite healthy."

PCE inflation could decline to 4% next year from 6% this year, and to 2.5% in 2024, Harker said.

"This will take time. Inflation is known to shoot up like a rocket and then come down like a feather."