Patrick Harker

I would like to see rates raised sooner rather than later. With an early start, we can better ensure that monetary accommodation is removed gradually and that inflation returns to the Fed’s 2 percent target smoothly. My fear is that the Federal Reserve risks losing its credibility and only adds uncertainty to the economic landscape the longer the Committee waits to begin normalizing policy.

Therefore, raising rates this year will, in my view, serve to reduce monetary policy uncertainty and to keep the economy on track for sustained growth with price stability.

It is also fair to say that the risks to my outlook are tilted to the downside. The nervousness in the financial markets and the increased caution that it may cause for economic decision-makers, both households and firms, could imply somewhat slower growth, at least in the first half of the year.

Also, inflation is not likely to pick up substantially until the second half of the year, although, for the reasons I have discussed, I remain confident that inflation will move toward the Committee’s long-run objective of 2 percent.

These considerations make me a bit more conservative in my approach to policy, at least in the very near term. 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. Thus, I am approaching near-term policy a bit more cautiously than I did a few months ago. That is part of being data dependent. And attentiveness to the data will be a key factor in all of my future policy recommendations as well. If financial headwinds dissipate quickly and inflation picks up a bit more aggressively, it will require a slightly more aggressive approach to policy.

I believe as we move into the second half of the year 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.

Good monetary policy — meaning monetary policy that delivers on our price stability mandate — by virtue of it being good, will not affect long-term economic growth. Of course, it goes without saying that bad monetary policy can derail the economy and reduce economic growth.

Here's another way to put it: There is a growth potential out there, and the best that monetary policy can do is to help achieve that potential, but it cannot affect the potential itself. So, there are limits to the effectiveness of monetary policy that we must be careful to respect. In real time, it is always a challenge to determine if the economy is at its growth potential or if it is operating above or below it. This uncertainty is at the heart of the genuine disagreements that members of the FOMC can have regarding the stance of policy.

It is surely at the heart of a knowledge-based economy that is not set up to respond swiftly to changes in business demands for new and old skills. This is especially true when these changes are not marginal in nature.

Even when a specific skill set is in demand, and a change in curriculum occurs to meet this, there is significant lag time involved in producing a pipeline of graduates who have acquired these skills.

Separately, reflect for a moment on the fact that it is only very recently that the U.S. Department of Education made detailed earnings information for college graduates publicly available. Until this change, prospective students could not compare the cost of attending a college with the benefits of doing so.

Where there is a lack of information regarding the return on this investment that colleges offer, there is a weakened connection with how we make sure workplaces get the skills they need. It is critical that this changes in the future.

Philadelphia Fed President Patrick Harker, a relatively new addition to the U.S. central bank, said that while he supported last week's decision by his colleagues to leave policy unchanged, "there is a strong case that we need to continue to raise rates."

"I think we need to get on with it," said Harker... "This economy is really quite resilient to a lot of the headwinds (including the strong dollar), so if that continues I would be supportive of another 25 basis point rise."

"I am not a two (rate) rise person. I'd rather see (more hikes this year)," he added.

That puts Harker in the hawkish camp of Fed officials, even though last month he urged patience and said more hikes could come in the second half of the year.

...

"Barring some unforeseen headwinds which are always possible, then I think it's appropriate to consider every meeting live ... and to consider another 25 basis-point rise" if employment and job growth improves and core inflation rises as they recently have, he said.

I am not a two rate-hike person. I'd rather see more (this year).

So far, survey evidence, like that obtained from the Philadelphia Fed’s Survey of Professional Forecasters, does not indicate any unanchoring of inflation expectations. However, market-based measures are showing that investors are seeking less compensation for inflation. But there are downside risks to my baseline forecast. In particular, we have been below our inflation target for all but two years since 2008. Consistently below-target outcomes will eventually lead to a lack of credibility for our 2 percent goal. Hence, it may be worth erring on the side of accommodation to ensure against that outcome.

I believe as we move into the second half of the year 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.

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.

Although I cannot give you a definitive path for how policy will evolve, I can easily see the possibility of two or three rate hikes over the remainder of the year. That said, all forecasts are subject to fairly wide confidence bands, and mine is no exception.

"Brexit" is a consideration in policy but not fundamental to US economy