Philadelphia Federal Reserve President Patrick Harker said the central bank should move very cautiously in raising the cost of borrowing in the U.S. because there’s little sign the economy is about to overheat.
Harker on Friday said slow and steady was the correct pace for future increases in U.S. interest rates given the current environment of stable growth and low inflation.
“My neighbors … say would you guys just relax,” Harker said. He gave a speech to the American Economic Association in Philadelphia and then took questions from reporters.
“We understand the risks of running an economy too hot, but I don’t see significant signs of that.”
The Fed raised a key U.S. interest rate three times in 2017 and it has forecast three more rate hikes for 2018. Yet the Fed is also undergoing a major reshuffling of its board and it’s unclear if the new leadership will stick closely to the central bank’s previous approach.
Harker is one voice for restraint. He pointed out that the Fed is struggling to understand why inflation is so low even though the unemployment rate has fallen to a 17-year bottom.
“I think we’re in a period right now, which I think reflects some of the uncertainty we have around understanding things like inflation dynamics,” he said.
“Absent hard data or a theory that we can hang our hat on, like the Phillips curve, we all struggling,” Harker said. I am intellectually struggling.”
Harker says he thinks only two rate hikes will be needed. Asked if he wanted to wait until June for the next move, Harker demurred, saying it depended on how the economy looks.
“I think we can take some time. I wouldn’t put a calendar date on it. It all depends on how the data comes in,” he said.
Harker is not a voting member of the Fed’s interest-rate setting committee this year.
Harker said he didn’t expect a large impact from the Republican tax plan, saying it would add somewhere in the range of 10 to 20 basis points a year to gross domestic product.
Harker forecast GDP growth near 2.5% rate in 2018. He said he expects inflation to pick and he wouldn’t mind if inflation went above the central bank’s 2% target.
“It is OK to overshoot it for awhile,” he said. “There are some signs [inflation] is firming, it is not accelerating,” he said.
The same is true for wages. The Fed has been expecting worker pay to rise a lot faster as businesses grapple with a shortage of labor, but it just hasn’t emerged.
“That’s why I am in a cautious stance right now,” Harker said.
He also said he was skeptical the Republican tax plan would push firms to raise wages. Businesses raise wages because they have to, not because they want to, he noted.