MNI INTERVIEW: Fed's Harker Ready To Start 'Methodical' Cuts
MNI (JACKSON HOLE, WYO.) - The Federal Reserve should begin the process of lowering interest rates in September and do so in a "methodical" fashion so businesses can plan accordingly, Philadelphia Fed President Patrick Harker told MNI on Thursday.
With the U.S. labor market normalizing and inflation cooling to target, "we need to start that process of normalizing rates," Harker said in an interview on the sidelines of the annual Jackson Hole symposium hosted by the Kansas City Fed.
The speed and size of rate cuts will depend on the data, particularly if the job market deteriorates in an unexpected way, he said.
Large downward revisions to jobs growth in the 12 months through March from the Labor Department this week were largely expected, and the unemployment rate likely will rise further in this cycle, he said. None of that would be concerning if other labor market indicators stay strong, Harker said.
"Inflation -- we know where that’s heading, barring unforeseen changes. If the labor market turns negative in a way we’re not anticipating, then I think we’ll have to accelerate the process. At this point it's not in our forecast."
NORMALIZING LABOR MARKET
It's important for the Fed to not overreact to a single data point, Harker said, referring to the volatile repricing of market expectations for interest rates after the unemployment rate unexpectedly rose to 4.3% in July. The jobless rate will likely peak below 5%, close to its natural rate of around 4.5%, he said.
Other labor market indicators and reports from business contacts indicate little immediate concern. Labor force participation has risen and Thursday's latest report on initial filings for jobless claims was in line with forecasts, he noted.
"You can't just look at that number. Look at claims, job-to-job transition rates, the totality of data," he said. "And what I've been hearing from my contacts all summer, it feels it’s easier for people to get employees." Few are reporting layoffs and demand for workers has normalized, he added.
Still, there’s always a risk of more dramatic worsening, he said. "That’s what we have to be cognizant of, and why I think we need to start taking action now, start the process of lowering rates."
INFLATION COMING DOWN
Harker is confident the Fed won't have to face the problem of inflation getting stuck above target.
Services costs are coming down as wages normalize, and while shelter inflation continues to stay more elevated than analysts expect, falling interest rates will help alleviate the structural shortage of housing in the country, Harker said. (See: MNI INTERVIEW: Housing Inflation To Fall Slowly-Fed's Mehrotra )
Bankers have already reported a jump in mortgage applications as Treasuries price in the prospect of Fed easing, and developers stand ready to break ground on rates relief, he said.
"When we start to normalize rates, we'll see the shelter inflation issue resolve itself over time as capacity comes online. I just don’t see the dynamics in the economy right now leading to a point where we get stuck significantly above 2%."
METHODICAL RELIEF
Key to sustained business confidence at the moment is a well orchestrated series of cuts on the Fed's part to bring rates back to neutral, which Harker estimates to be around 3%, he said.
"They're just asking for as much certainty as we can provide. Not certainty -- and this is important -- in terms of the exact number, whether it's 25 or 50 bps. But just the process. Just move it down in a methodical way. That's the word I heard," Harker said.
The ultimate destination for rates is uncertain, but might be higher than it was in the past, he said.
"I think it’ll settle around 3-ish," he said. "It’s a number that’s unknowable. We just have to let the real data, market data, inflation data, labor market data dictate where we’ll end this cycle."