MNI: Fed’s Harker Sees Rates On Hold, Can’t Say How Long

The Federal Reserve should stop raising interest rates and hold them at their current 22-year highs for as long as it takes to ensure inflation is sustainably on a path back to its 2% target, Philadelphia Fed President Patrick Harker said Monday.

“I believe that we are at the point where we can hold rates where they are,” Harker said in prepared remarks to the Mortgage Bankers Association. “My expectation is that rates will need to stay high for a while.”

Exactly how long is impossible to say at the moment, he added. Harker thinks the Fed can steer the economy toward price stability without pushing it into recession.

“Disinflation is under way, labor markets are coming into better balance, and economic activity continues to be resilient,” he said. (See: MNI POLICY: Softer Trend Inflation Boosts Case For Fed Pause)

“I believe such a resolute, but patient, stance of monetary policy will allow us to achieve the soft landing that we all wish for our economy.”

RETHINKING MODELS

Harker said the economy’s strength despite the Fed’s aggressive rate increases is making him rethink traditional economic models like the Phillips curve.

In addition to Fed tightening, tighter credit conditions starting during the banking turmoil in March are also putting a damper on economic activity.

“The workings of the economy cannot be rushed, and it will take some time for the full impact of the higher rates to be fully absorbed. My argument is that by doing nothing, we are doing something. And I think we are doing quite a lot,” Harker said.

He acknowledged that the rise in interest rates has taken a heavy toll on the housing market.