Turning a little to the conservative side, Federal Reserve Bank of Philadelphia President and Chief Executive Officer Patrick T. Harker Tuesday suggested holding off raising the fed funds rate target until inflation increases.
“Although I cannot give you a definitive path for how policy will evolve, it might prove prudent to wait until the inflation data are stronger before we undertake a second rate hike,” Harker told the Greater Philadelphia Chamber of Commerce, according to prepared text released by the Fed. “So, I am approaching near-term policy more cautiously than I did a few months ago. That is part of being data dependent.”
Harker predicted the economy will grow at or slight better than trend in the last half of 2016, with full employment, allowing policy to “truly normalize,” which he defined as moving “away meaningfully from the zero lower bound and that our reaction to incoming data can return to a more historical pattern.”
However, he cautioned, that doesn’t “necessarily imply an overly aggressive path for policy. Thus, it will take fewer rate hikes to attain neutrality in policy than it would have 15 years ago. By historical standards, that in itself implies a somewhat shallower path for interest rates than was typical of past recoveries.”
As a result of low oil prices, Harker said, “inflation is likely to be quite low in the first quarter of the year, probably even negative.” But the labor portion of the Fed’s dual mandate will so be met, if it hasn’t already been met.
Inflation will return to 2% in the medium term, he predicted. “Math is in our favor: Energy prices would need to fall again and, by a similar magnitude, to renew their downward pressure on inflation. In other words, even if energy prices remain at very low levels, inflation should naturally rebound as current prices become the base upon which price increases are computed.”
Also other headwinds including import prices will “stabilize” with the dollar. “Granted, this process will take some time as the price cuts are transmitted across the economy,” Harker noted.
The global headwinds, Harker said, “make me a bit more conservative in my approach to policy, at least in the very near term.”
Data will drive Harker’s “future policy recommendations,” he said. “If financial headwinds dissipate quickly and inflation picks up a bit more aggressively, it will require a slightly more aggressive approach to policy.”
