Saying conditions have made him "a bit more conservative" on monetary policy, Federal Reserve Bank of Philadelphia President and Chief Executive Officer Patrick T. Harker said Tuesday he wants to see inflation rise before the Federal Open Market Committee raises rates again.
"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 an audience in Delaware, according to prepared text released by the Fed. "Thus, I am approaching near-term policy a bit more cautiously than I did a few months ago."
While employment is doing well, with the Fed reaching its goal early in 2016," if we have not attained it already," Harker said, inflation remains too low. With oil prices low, inflation will remain "quite low" this quarter, he said, "probably even negative."
But, he expects inflation to "return to target" in the medium-term. "Arithmetic 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 on which price increases are computed."
Also, import prices will stabilize as the dollar does, also tamping inflationary pressure. "Granted, this process will take some time as the price cuts are transmitted across the economy," he said. "Thus, my outlook sees inflation returning to target only gradually, more gradually than I thought just a few months ago."
Risks to Harker's outlook, he said, "are tilted to the downside." Financial market skittishness and its impact on spending "could imply somewhat slower growth, at least in the first half of the year."
In the second half of 2016, Harker said, with "economic activity growing at trend or slightly above trend, the unemployment rate below its natural rate, and price pressures starting to assert themselves, policy can truly normalize. I mean this in the sense that we can move away meaningfully from the zero lower bound and that our reaction to incoming data can return to a more historical pattern."
But, he cautioned, "That would not 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."
