MNI INTERVIEW2:Fed’s Harker-Soft Landing In Sight, Jobs Weaker

The Federal Reserve appears on track to pull off a gradual decline in inflation without a major spike in unemployment – the vaunted soft landing – as signs mount that the job market is cooling but not grinding to a halt, Philadelphia Fed President Patrick Harker told MNI.

“Right now our forecast is we’ll see unemployment tick up to 4-ish%, back to its natural rate, with a continued deceleration of inflation,” he said in an interview on the sidelines of this year’s Kansas City Fed Symposium. Unemployment has recently hovered near historic lows around 3.5%

“There’s clearly been a softening in the labor market. It is easier for firms to find people to work. And people aren’t leaving at the same rate they were.”

Harker said his contacts with businesses and community leaders around the Philly Fed’s district suggests firms’ pricing power is weakening as well, though growth remains fairly robust. (See MNI INTERVIEW: Fed’s Harker Says Probably Time To Stop Hiking)

“They are losing some pricing power and you can see that, visibly, just drive by any auto dealer and look at the lot. There are a lot more cars and it’s easier to get them,” he said.

“We heard from a major supplier of back to school sales, they’re seeing some softening even in that market. Things just seem to be slowing down. And people seem to be going downmarket, they’re going for the less expensive options – we’re hearing that a lot as well.”

Harker is heartened by the prospect of declining rental lease costs which he sees as a harbinger for lower shelter costs in key consumer price measures.

“We know where shelter is going that’s coming down. We see the real time rents, we’re starting to see things moving in the right direction. That’s good because that’s a big chunk of the American budget,” he said.

CUTTING BACK HOURS

Another sign of labor market cooling is a reduction in hours worked, he said. “In some cases they are cutting back on hours but trying to retain the workers. So you’re seeing that, part-time for economic reasons has gone up because people are trying to hold on to the workers that they fought hard to get during the pandemic.

On the lending front, Harker said credit has gotten tighter, particularly for office space in urban centers

“We have a lot of community banks in our district. On commercial real estate you really need to parse things out, it’s not one large bucket. The banks who were banking warehousing and logistics operations, that’s still active. Suburban office, that still seems ok – we still have to go to the dentist so the dentist needs an office,” he said.

“The area is downtown office space, we know the struggles there, there are concerns. So when it comes to the credit tightening, particularly in that downtown office space area is where they’re pulling back some.”