Philly Fed President Predicts Further Rate Hikes This Year And Next

Philly.com

March 01--Patrick Harker, president of the Philadelphia Federal Reserve Bank, on Thursday gave a cautiously optimistic outlook for the U.S. economy, saying he expects one interest rate hike of 0.25 percent in 2019 and another in 2020.

“Starting with GDP, I see growth a bit above 2 percent for this year, returning to a trend of around 2 percent some time in 2020. While some may view that growth rate as disappointing, it reflects structural, slow-moving forces -- like demographics, muted growth in the labor force, and lower productivity growth -- rather than any temporary headwind," he said.

"So I still see the outlook as positive: The U.S. economy continues to grow in what is on pace to be the longest economic expansion in our history,” he told an audience assembled for the Inquirer’s Influencers of Finance awards at the Crystal Tea Room.

Harker, like 10 other regional Fed presidents (the one in New York is permanent), is a rotating member of the Open Markets Committee, which sets interest rates. He always attends the board meetings and puts in his two cents. He will be able to vote in meetings in 2020, but not in 2019.

He expects economic growth closer to 1.5 percent in the first quarter of 2019, as household spending continues at a strong, sustained pace.

Businesses, on the other hand, “have reported an increase in uncertainty and a decrease in confidence," he said. "Coupled with tighter financial conditions, the investment outlook is not quite as rosy as last year. It’s certainly not a dire one, but … the ambiguity of the current climate appears to be having a dampening effect.”

Overall, the economy remains “pretty good,” Harker said. A strong employment picture is supported over the last couple of months by “more people coming off the sidelines to join the labor market. In fact, the primary concern we’re hearing anecdotally is not the lack of jobs but the dearth of skilled workers.”

Inflation continues to run at the Fed’s "preferred 2 percent target. For several years, it was persistently low, finally moving up to our goal last year. I see inflation running slightly higher than 2 percent for this year and next. As Fed watchers well know, when we say our goal is 2 percent inflation, we don’t mean the sweet spot is exactly 2 percent all the time; it’s our medium-term average.

“What I’m watching most closely is inflation’s trajectory,” he explained, what direction it’s headed and how fast. “Right now, we’re not seeing significant upward pressure, and it’s not on an accelerated path. If anything, it’s edging slightly downward.”

Given a temperate climate for inflation, “my own view is that one rate hike for 2019 and one for 2020 are appropriate.”

The U.S. Federal Reserve raised interest rates in December 2019. The central bank increased rates a quarter of a percentage point, to a range of 2.25 percent to 2.5 percent, the ninth such move since late 2015. The rate hike further signaled the Fed’s confidence in the U.S. economy.

A similar view of the U.S. economy came from Wells Fargo Economics Group. “Several signs point to a moderate slowdown in overall economic growth relative to the strong pace registered throughout 2018,” noted the report, dated Feb. 22. "The weakness in the housing market felt through much of last year has extended into 2019.

But “lower mortgage rates more recently make us optimistic that gradual improvements in home sales should be forthcoming,” the report said.

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The Influencers of Finance panel, which followed Harker’s prepared remarks, focused on innovation in fintech, shorthand for financial technologies.

Innovations among financial advisers include voice-prompted data search, said Jess Liberi, head of product at eMoney Advisor, which was acquired by Fidelity. Other panelists included Frank Coates, founder and CEO of Wheelhouse Analytics, and Julapa Jagtiani, senior special adviser at the Philly Fed.

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