MNI INTERVIEW: Fed's Harker Wants Rates Above 3.4% By Year-End

Philadelphia Fed President Patrick Harker on Thursday told MNI the U.S. central bank should raise its benchmark interest rate above 3.4% by December to combat soaring inflation, adding that rates could continue rising next year or hold at that level for some time.

The Fed has moved aggressively this year to lift the fed funds rate to a 2.25% to 2.5% range, with another 50 basis point or 75 basis point hike expected next month as its preferred PCE inflation gauge climbed to 6.8% in June, a four-decade high.

"I'd like to see us get to a clearly restrictive stance by the end of the year -- north of 3.4%, which was the median in the last SEP -- and then maybe continue to increase depending on the data, or just sit there for a while," Harker told MNI's FedSpeak podcast on the sidelines of the Kansas City Fed's annual Jackson Hole Symposium.

As for the size of the September rate increase, Harker said he's reserving opinion until all the data are in hand. "We often think now because of the 75s that a 50 is not impactful," he said. But "a 50 basis point move is still very substantial."

SIT AT RESTRICTIVE

The current level of rates is likely in the "long-run or medium-term neutral range," Harker said, but "because of where inflation is, we have to rise above that."

Once rates get to a restrictive stance, Harker said he wants to give monetary policy time to work through the economy. "I'd like us to get up to a restrictive stance and then sit there for a while before we consider cutting rates to let this work." (See MNI INTERVIEW: Fed's Bullard-Rates Could Be 'Higher For Longer')

Monetary policy can put a lid on demand, even as supply chain bottlenecks limit the Fed's ability to bring inflation down, Harker said. Labor markets remain tight with a record number of job openings.

As rates rise, the unemployment rate "will rise, but I don't see it rising to where some people have said, say, 5%. That's always possible but I don't think it's probable at this point."

GLIMMERS OF HOPE

Harker expects headline PCE inflation to end the year at 5.5% and core inflation to stay above 3.5% this year and next.

The July CPI report offered "glimmers of hope" as price rises eased to 8.5% from 9.1% a month earlier, Harker said. "We still have a long way to go to get inflation under control."

Harker wants to see continued decreases in the pace of inflation as well as a steady decline in the number of product categories registering above-5% inflation. "We'll see how the data evolves over the next two months, three months, four months," he said. "This is going to take some time."