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Update: US inflation likely to run higher than expected, Harker says


According to Market Intelligence, February 2023


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Update: US inflation likely to run higher than expected, Harker says

Philadelphia Federal Reserve President Patrick Harker said he has revised his inflation expectations upward from his earlier prediction.

The effects of fiscal stimulus and stronger economic activity should lead to "above-trend growth of about 2.6 percent for 2018," Harker said in prepared remarks to a business group in New York on March 29. "Overall, that’s a very slight upward revision for my 2018 forecast but a stronger outlook over the medium term."

Employment should also remain strong, Harker said, with the unemployment rate "possibly dipping as low as the 3.5% range in 2019." U.S. unemployment currently stands at 4.1%.

Earlier, Harker told the Wall Street Journal that he had raised his expectations for rate hikes for all of 2018 from two to three, chiefly because of inflation expectations. The Federal Open Market Committee has already raised its benchmark federal funds rate once this year, at its January meeting, to a range between 1.50% and 1.75%.

Harker is not a voting member of the FOMC this year, though he participates in policy deliberations.

The central banker said he was watching the shape of the yield curve — the difference between long-dated and short-dated bonds — which has continued to flatten, as an indicator of whether the Fed is on the right track with rate hikes.

He said he was also carefully watching what happens to the curve as the European Central Bank begins tapering its asset buying program, noting that "there’s no one dynamic that's changing the shape of the yield curve."

The Fed's reliance on some of its models should be reconsidered, Harker said. The Phillips curve model, which is supposed to show an inverse relationship between unemployment and inflation, "for at least the last 30 years hasn't been predictive of anything," he said.

"Some would say the concept, though theoretically sound, isn’t helping us in terms of prediction," he said.

Harker said he viewed machine learning as an intriguing possible path to "tons of information" that may not be captured by current models.

He said, however, that he was concerned about the future dynamism of America’s business environment, especially given an aging population and changing immigration patterns.

"Growth, as we all know, is fundamentally growth in the labor force plus growth in productivity," he said. "We simply do not have the population to keep growth at even its current rate over the long term."

"I would also note that immigrants either founded or co-founded just over half of all U.S. startups valued at $1 billion or more, and immigrant founders have created an average of 760 jobs per company," he added.

Harker told the Journal that he was pleased that San Francisco Fed President John Williams was considered the front runner for New York Fed president to replace William Dudley when he retires later this year.

At the March 29 event, he reiterated that Fed presidents should be selected by the individual Fed boards, rather than through congressional nomination procedures as some legislators have called for.

"I worry about the independence of the Fed," he said. "Would you do that for all 12 Fed presidents and supersede the roles of the [regional Fed] banks and their boards?"