Harker: Inflation Will Come Back, so Rates Must Rise
With little slack in the labor market, “inflation is likely to reassert itself at some point, so increasing the fed funds target rate “makes sense,” Federal Reserve Bank of Philadelphia President Patrick Harker said Sunday.
“From my perspective, removing accommodation is the right next step for a few reasons,” Harker said in a speech in Tokyo, according to prepared text released by the Fed. Among the reasons he cited: an economy “more or less at full strength”; nearly a decade of accommodative monetary policy; and growth on pace with projections.
“Inflation is still below the Fed’s target rate and is the one area that not only continues to elicit caution,” he said, “it even constitutes a conundrum.”
The Fed must be cautious “about how we’re measuring inflation,” he noted, arguing “the Phillips curve has not been a good predictor of inflation” for “several decades.”
Additionally, he noted, raising rates will be a safety measure in case of a shock. “I want our tools to be at their most effective and, in my view, that means reducing our balance sheet. Additionally, as productivity has dropped, it’s taken the neutral funds rate with it, making the zero lower bound closer and resulting in less room for maneuver with the funds rate, which will continue to be our primary monetary policy tool.”
“The famous line is that the Fed takes away the punch bowl just as the party is getting good,” Harker said. “I don’t think we’re taking away the bowl; I think we’re making sure there’s enough punch for the future.”