Philadelphia Federal Reserve President Patrick Harker suggests the central bank may be nearing the end of its current cycle of interest rate hikes, according to remarks made at a speech in Philadelphia. Harker, who is also a voting member of the rate-setting Federal Open Market Committee (FOMC), cited progress in the battle against inflation and expressed confidence in the strength of the economy. He stated, “Absent any alarming new data between now and mid-September, I believe we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work.”
This statement from Harker comes after the FOMC approved its 11th interest rate hike since March 2022 in July, raising the Fed’s key interest rate from near-zero to a target range of 5.25%-5.5%, the highest in over two decades. While forecasts made by committee members in June pointed to an additional quarter-point increase in rates later this year, there are differing opinions on the way forward. New York Fed President John Williams indicated in an interview with the New York Times that the rate increases could be coming to an end, while Governor Michelle Bowman believes further hikes may still be necessary.
Market expectations are currently indicating over an 85% probability that the Fed will hold rates steady at its upcoming September 19-20 meeting. Market pricing data from CME Group also suggests the possibility of the first rate cut occurring around March 2024.
Harker made it clear that rate cuts are unlikely to occur anytime soon, stating, “Allow me to be clear about one thing, however. Should we be at that point where we can hold steady, we will need to be there for a while. The pandemic taught us to never say never, but I do not foresee any likely circumstance for an immediate easing of the policy rate.”
The central bank’s decision to tighten monetary policy was prompted by inflation reaching its highest level in over 40 years. Initially dismissing the price increases as “transitory,” the Fed was eventually compelled to implement a series of four consecutive three-quarter point raises. Although concerns have been raised by economists that these moves could potentially lead to a recession, Harker expressed confidence in a gradual progression towards the Fed’s 2% inflation goal, a slight increase in unemployment, and slightly lower economic growth compared to earlier in 2023. GDP growth stood at 2% in the first quarter and 2.4% in the second quarter.
Harker did voice concerns over commercial real estate and the impact of the resumption of student loan payments on the broader economy. Policymakers will gain further insight into the progress against inflation with the release of the Bureau of Labor Statistics’ consumer price index report on Thursday, which is forecasted to show a 0.2% increase in prices from the previous month and a 3.3% rise on a year-on-year basis. Excluding food and energy costs, the CPI is projected to grow by 0.2% and 4.8%, respectively.