Harker sees one rate hike in 2019, one in 2020

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If the economy moves as expected, Federal Reserve Bank of Philadelphia President Patrick Harker expects one rate hike this year and one next year.

“With a temperate climate for inflation; continued strength in the labor market; very slight downside risks; solid, but moderate growth projections for the next couple of years; and, of course, a climate of uncertainty, I continue to be in wait-and-see mode,” Harker told local business leaders Wednesday according to prepared text of his remarks released by the Fed. “Or, to use the word of the moment, I see patience as a virtue. My own view is that one rate hike for 2019 and one for 2020 are appropriate.”

Data and events will guide his decisions, Harker noted, which is why the Fed needs to hedge a bit. “I know some people wish that Fed officials would retire the metaphorical pencil we use in our forecasts and be more forceful in our estimates,” he said. “And I’m happy to use a pen ... so long as it’s filled with erasable ink.”

The economy, as measured by gross domestic product, should rise “a bit” above trend in 2019, and slip to near 2% “some time in 2020,” Harker said. And, while some observers would consider that rate “disappointing,” he sees “the outlook as positive.”

The current expansion appears to be on track for the longest in U.S. history, despite a first quarter that is likely to be below trend. “[T]here are multiple contributing factors here, not least being that first quarters have seen low or negative growth for several years running, enough to have essentially become the norm,” Harker said. But he expects faster growth later in the year.

While consumers have been spending “at a strong, sustained pace,” he said, businesses see more uncertainty about the future, which led to a decline in confidence. “Coupled with tighter financial conditions, the investment outlook is not quite as rosy as last year. It’s certainly not a dire one, but the specter of uncertainty does cast a shadow, and the ambiguity of the current climate appears to be having a dampening effect.”

In a world economy, Harker said, he’s watching “international influences, including the outlook for growth abroad and trade developments.”

He sees risks tilting “very slightly to the downside,” emphasizing “slight.”

Inflation, Harker said, remains “around our preferred 2 percent target,” but he sees it slightly above 2% in 2019 and 2020. “While I would be concerned if it rose significantly above that marker, running slightly above, as I predict we will this year and next, is not something that provokes concern, particularly after a sustained period of underperformance.”

And it’s core inflation that he concerns himself with. “What I’m watching most closely is inflation’s trajectory: what direction it’s headed and how fast,” Harker said. “Right now, we’re not seeing significant upward pressure, and it’s not on an accelerated path; if anything, it’s edging slightly downward. If that scenario changes, the data will guide my views.”

Harker does not have a vote on the Federal Open Market Committee in 2019.

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Monetary policy Patrick Harker Federal Reserve Federal Reserve Bank of Philadelphia FOMC