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MNI (Washington)

Federal Reserve Bank of Philadelphia President Patrick Harker wants to see inflation heading above 2% before possibly dialing back asset purchases, calling for patience as the economic rebound from the coronavirus pandemic accelerates this year, he told MNI in an interview Wednesday.

"I'd like to see inflation moving above 2% or on its path to moving above 2% before I would consider" starting to taper purchases, Harker said. "Low unemployment and inflation, that's our dual mandate, but a lot of this is dictated by seeing movement in inflation."

Hanging dates on the milestones for reaching the inflation goal or tapering QE is difficult at this point given the uncertainties of the Covid vaccination campaign and when communities might achieve herd immunity, he said. It could be later this year or next year, he said.

"Our modal forecast might say that in 2022, with inflation at 1.9% and moving toward 2%, tapering could be appropriate," he said. "It is a state-based policy, not a date-based policy."


The Fed is buying at least USD120 billion a month of debt as it seeks to hold down yields with its policy rate already set near zero. Some FOMC officials have signaled they want to begin discussing QE tapering later this year, citing a potential economic surge as vaccines are distributed.

The Fed should make as few moves as possible between now and the winding down of the pandemic, Harker said. That could mean holding on even if the economy shrinks again this quarter amid record Covid cases, and if inflation gets a boost after last year's weakness.

"Given the signals we're seeing, we could potentially see some negative growth in Q1 this year. That's concerning, but understandable given this rapid resurgence of the virus," he said.

Philadelphia Fed economists expect a burst of activity in the second half of the year to make up for weakness in the first six months. With the new USD900 billion fiscal package and trillions more promised by President-elect Joe Biden, growth could hit 3.8% this year and unemployment fall back to 5.8% by December. Inflation is expected to "creep up to 2%" by 2023 "then start to overshoot, but not out of control," Harker said.


As low inflation readings of last spring drop out of the 12-month calculations, "there could be an inflation scare, but we have to look through that and not just take one spike in inflation as a signal to take action," Harker said.

"I take my own forecasts with several grains of salt here. So I think we just need to be cautious," he said. "Let's not remove accommodation too quickly. Let's just take our time, until we see the signals that we want to see in terms of unemployment and inflation."

Employers in the Philadelphia Fed district continue to report difficulty finding workers, while many firms are contemplating how Covid will reshape their industries, Harker said. Business supplying other firms, especially in travel and commercial real estate, are "significantly concerned."

Policymakers should try to "save as much of the economic infrastructure as we can" by providing a fiscal bridge for businesses and ensuring eviction bans are in place, he said. Over the longer run, regional Fed banks can play a role in shepherding workers to new jobs.


The natural rate of unemployment may have shifted over the course of the health crisis, and "this is why we need to be humble and prudent when it comes to policy, not making certain moves in any direction," Harker said.

Before Covid, "we were getting unemployment lower than a lot of us, including myself, thought was possible without inflation running hot. So I think trying to get back to that world is a reasonable strategy," he said.

"We put a policy in place to start to heal the economy and then watch carefully and see how inflation evolves."

MNI Washington Bureau | +1 202-371-2121 |
MNI Washington Bureau | +1 202-371-2121 |