Patrick Harker, president of the Federal Reserve Bank of Philadelphia, said Thursday that the central bank needed to conduct further monetary tightening to bring down inflation to the two percent target.
“Some additional tightening may be needed to ensure policy is restrictive enough to support both pillars of our dual mandate,” Harker said. “Once we reach that point, which should happen this year, I expect that we will hold rates in place and let monetary policy do its work.”
Harker is a voting member of the rate-setting Federal Open Market Committee (FOMC), which will meet on May 2-3 to discuss the upcoming rate policy. Futures tied to the Fed’s policy predict a significant probability that the committee will increase the interest rate by 25 basis points to the range of 5.00 to 5.25 percent.
Analysts further expect the Fed to maintain the rate at that range for the year, against the earlier prediction that the central bank will start cutting rates in September.
Harker believes the U.S. economy remains strong and inflation is coming down at a slow pace. The consumer price index showed annual headline inflation of five percent in March, the lowest level since mid-2021. However, analysts pointed out that core prices, which exclude volatile food and energy costs, remained at the same level over the past year.
The non-farm payroll report also showed that the U.S. added 236,000 jobs in March, slightly lower than the earlier estimates of 238,000. At the same time, the unemployment rate hit 3.5 percent from 3.6 percent in February.
Analysts said the payroll data showed signs of a cooling labor market, but not yet at the pace needed by the Fed to tame inflation. A robust U.S. labor market has become a major concern for Fed officials in the past year since it can drive wage inflation, making it more difficult for the central bank to control price growth.
Harker also elaborated with further monetary tightening could bring inflation down to 3.5 percent this year and to two percent in 2025. He added that the unemployment rate would likely rise to 4.4 percent by the end of the year as the economic growth went “tepid.”
Impact of banking stress remains unknown
According to Harker, the banking stress in March will weigh on the U.S. economy, although the impact remains unclear. Last month, two large regional lenders, Silicon Valley Bank and Signature Bank, suddenly collapsed following liquidity issues. The shutdowns caused volatility in the share price of U.S. banks, even the larger ones.
Although the banking crisis has subsided due to liquidity support from U.S. financial authorities, analysts say there will be long-term impact that the U.S. economy will experience. Banking stresses may lead to tighter lending requirements by banks, meaning that it will be more difficult for businesses and households to obtain loans. It can result in a significant decline in economic growth.
Some other Fed officials have also discussed the risk of the banking turmoil, especially concerning the central bank’s rate policy. Fed Board Governor Christopher Waller said he and other central bank officials would monitor the development of the financial system to determine the next policy action. Similar to Harker, Waller supports further interest rate hikes to stabilize prices.
Meanwhile, Chicago Fed president Austan Goolsbee urged the central bank to be more cautious about hiking the interest rate. Goolsbee said the Fed should closely monitor economic data in the near future to see the impact of the tightening of credit conditions.
