The economy is doing well and the Federal Reserve should hold rates for now, Federal Reserve Bank of Philadelphia President Patrick Harker said Friday.
The problems of the repo market do “not affect the stance of monetary policy” or “have a meaningful impact on the economy going forward,” he said at a meeting of the Shadow Open Market Committee, under the auspices of the Manhattan Institute. He explained, “It’s important to note the repo market did not freeze” and “ultimately [it] did function.”
Harker's comments came after a cash shortage pulled the U.S. bank's benchmark rate above the target range earlier this month, forcing the New York Fed to intervene with overnight cash repo loans this month for the first time in a decade.
While the Fed’s response has been “appropriate,” Harker said, the questions that must be answered are whether the current level of reserves is adequate and whether the Fed needs to expand its tool kit. “It’s possible our reserves are near or approaching appropriate levels” and the balance sheet may need to grow organically.”
I that happens, Harker stressed, “this is not QE4,” a reference to quantitative easing. in which a central bank purchases securities to increase the money supply and encourage lending and investment. He dismissed the possibility that the issues were related to key members of the New York Fed, including Simon Potter, leaving earlier this year.
Before committing to a solution in a “rush to judgment,” Harker suggested taking “time to figure out what happened” to cause the issue. The date tax payments were due was known in advance, so that shouldn’t have caused a problem. But, he noted, these “temporary” problems have “happened in the past.”
His view of the economy “hasn’t changed in the past year. The labor market is strong, inflation is slowly moving higher and is “within shooting distance” of the Fed’s 2% target, which he said could be accomplished in 18 to 24 months.
Consumers have fueled the economic expansion, which “makes sense” given the strong employment situation, but there are “clearly downside risks.” He noted “a cloud of uncertainty” that affects business decisions, which shows up in confidence data.
“My view is we hold firm and see how things settle out over the next weeks or months,” Harker said. Although he is not a voter on the Federal Open Market Committee this year, Harker said he did not support the latest interest rate cut. Despite “a lot of noise and uncertainty, things seem to be pretty good.”
With data suggesting the “economy continues on a path toward trend growth,” and rates being “probably pretty close to neutral,” Harker said, holding firm is the way to go. As for the past two rate cuts providing “insurance,” he said, “I’m a skeptic.” The reasons companies and individuals won’t invest “has nothing to do with the cost of capital. It’s the uncertainty” that’s making them hold off. “A 25 or 50 basis point rate cut won’t pull that lever.”
The issues with the economy “have little to do with the stance of monetary policy,” Harker said. “The best thing to do is to let the economy ride and see how things shake out.”
