Harker: In­fla­tion Will Come Back, so Rates Must Rise

The Bond Buyer - - Market News - — Gary E. Siegel

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.”

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