FOMC Member Harker: The Fed may be at a point where it can maintain interest rates unchanged.
Internal divisions reemerge within the Federal Reserve as Philadelphia Fed President Harker stated in a speech that the Fed may be at a point where it can pause its rate hikes, but interest rates need to be maintained at a higher level for a period of time.
Philadelphia Fed President Patrick Harker said that as long as recent economic data continues to remain stable, the Fed may be at a point where it can maintain interest rates unchanged.
On Tuesday, August 8th, Patrick Harker, the president of the Philadelphia Fed and a voting member of the 2023 FOMC, stated in a speech that the Fed may be at a point where it can stop raising interest rates, but rates need to remain at a higher level for some time. The U.S. economy is heading towards a soft landing.
Harker stated that if the data released between now and the mid-September policy meeting is as expected, it would mean that the Fed may have reached a point where it needs to remain patient and maintain stable interest rates in order to let monetary policy take effect.
Harker added that it is unlikely that policy will be immediately eased in the foreseeable future.
Like other Fed officials, Harker is optimistic about the recent data, which suggests that inflation has fallen significantly from its four-year high. He expects this trend to continue:
He now expects the PCE price index, excluding food and energy costs, to fall to slightly below 4% by the end of the year, drop below 3% in 2024, and reach the target of 2% in 2025.
However, not all officials agree that the Fed's rate hikes may be coming to an end. Just yesterday, significant divisions within the Fed became apparent. Michelle Bowman, a Fed governor and current FOMC voting member, reiterated her view that the Fed needs to continue raising rates to fully restore price stability.
During an event on Monday, Bowman stated that she voted in favor of raising rates at the July policy meeting and expects further rate hikes to bring inflation back to normal levels.
Bowman said that the Fed's future actions will depend on the upcoming economic data, and at present, the labor market remains tight:
"Over the past year, we have made progress in reducing inflation, but inflation is still significantly above the FOMC's 2% target, and the labor market continues to be tight, with job openings far exceeding the number of available workers."
The nonfarm payroll report on Friday also showed that nonfarm payrolls increased by 187,000 in July, below expectations. However, the unemployment rate unexpectedly dropped to 3.5%, maintaining its lowest level in decades.
Bowman also stated on Saturday that she is looking for evidence of sustained and meaningful downward inflation to determine whether to further raise the federal funds rate.
Bowman's views differ significantly from those of John Williams, the president of the New York Fed, who has permanent voting rights on the FOMC.
According to The New York Times, Williams stated in an interview that if inflation continues to decline and the Fed does not lower interest rates, real interest rates will continue to rise, which contradicts the Fed's goals. Therefore, there may be rate cuts next year or the year after. Williams believes that the significant labor force growth over the past year has largely come from the recovery of the labor market after the pandemic. However, this growth is unlikely to continue indefinitely.
The Federal Reserve raised the benchmark short-term interest rate by 25 basis points to a range of 5.25% to 5.50% at the end of last month. Investors generally believe that this will be the last rate hike in this cycle, but Fed officials emphasize that it is still too early to make such a judgment.
The next FOMC meeting will be held in September, giving Fed officials time to review more data on inflation, the job market, and the broader economy.