Federal Reserve Bank of Philadelphia President Patrick Harker said Wednesday that the central bank must begin interest rate cuts, although not immediately, as several Fed Officials opened up their stance on the matter.
Harker's comments provide a milder resistance to the prevailing market anticipation of rate reductions in early 2024 compared to some colleagues. He highlighted that the economy seems to be slowing at a faster pace than what current government data reflect, noting their backward-looking nature.
He also emphasized the importance of observing the impacts of those aggressive increases in borrowing costs on the economy before further actions.
Policymakers maintained rates within the 5.25-5.50 percent range for the third consecutive time at the Federal Open Market Committee (FOMC) meeting last week, signaling the conclusion of their rate hiking strategy. However, Fed Chair Jerome Powell said another rate hike is still in consideration if market conditions call for it.
"I've been in the camp of, let's hold rates where they are for a while, let's see how this plays out, we don't need to raise rates anymore," Harker said in an appearance on WHYY, a local radio station. "We don't have to do it too fast, and we're not going to do it right away."
Harker was an early advocate for ceasing policy tightening, cautioning in October against overreacting to short-term data fluctuations. He also shared a similar statement to Powell back in early November, preferring steady rates but not ruling out a future increase, as the policy direction would hinge on incoming data.
During the radio interview, Harker mentioned the plausibility of a "soft landing" for the economy, restoring inflation to the Fed's target of two percent, and that preserving a stable job market is achievable.
He anticipates a slight increase in unemployment but noted improved hiring prospects for companies. Harker also cited lowering rates as a means to assist struggling businesses dealing with high borrowing costs.
Despite these positive developments, Harker cautioned against excessive optimism. While they were making progress on inflation, it was still too early to declare victory. He said the job inflation is "not done."
While Harker won't participate in policy voting next year due to mandatory retirement in 2025, he remains involved in FOMC discussions. He refrained from specifying the ideal timing or number of rate cuts the Fed should implement next year.
Multiple policymakers have also pushed back against growing market predictions suggesting the Fed will begin rate easing in March. John Williams, the President of the New York Fed, warned against early discussions of a March rate cut, considering it "premature". President of the Cleveland Fed Loretta Mester also said market forecasts were "a little bit ahead."
How rate easing will affect the market
Reduced rates could lower borrowing costs. Mortgage rates, currently close to a two-decade peak of nearly eight percent, might decrease. This could result in more affordable business lending, releasing corporate profits that enhance the appeal of stocks.
Barclays noted that a shift to dovish monetary policy has frequently enabled equities to achieve new market peaks. Over the past four decades, the period between the final Fed rate increase and an ensuing recession almost consistently resulted in the S&P 500 reaching record highs.
As the Fed's July rate hike appears to conclude its tightening cycle, the same pattern is expected to occur. However, Barclays exercises caution due to the persisting challenge of high inflation.
The Fed has previously paused rate hikes ahead of a recession, allowing for new stock market highs before the eventual downturn. However, during periods aimed at curbing high inflation, the gap between a Fed pause and a recession tends to shorten, occasionally overlapping. Barclays cautioned that if this pattern applies today, it could pose risks for stocks.