WASHINGTON / New York – The Federal Reserve will convene the Federal Open Market Committee on Sept. 21 and 22, where all eyes will be on whether the U.S. central bank will begin to pick up the pace of its monthly bond purchases.
Fed Chairman Jerome Powell has said it will likely begin to shrink before the end of the year.
Nikkei spoke with Patrick Harker, president and CEO of the Federal Reserve Bank of Philadelphia, to hear his views on the moment.
The edited fragments follow:
Q: August occupations were below market expectations and meant a slowdown from July. How do you think this will affect the reduction of debate at the Federal Open Market Committee meeting?
A: In my opinion, it makes no sense that there is a lack of demand. If you look at the latest JOLTS [Job Openings and Labor Turnover Survey] data, we have a record number of job offers. [The problem] it is not a lack of demand; they are supply problems.
Supply problems are due to a myriad of factors, but first and foremost are people, whether they are concerned about their children or the care of the elderly, or are afraid to return to work or to do mass transportation to the main cities to get to the workplace.
Does monetary accommodation, as delivered through the purchase of assets on a large scale, affect supply? No, it affects demand.
During the onset of the pandemic, as the Federal Reserve gave unprecedented support to the economy, one of the things we did was restart large-scale asset purchases in order to do two things. One is to provide monetary accommodation. The other was to get the [treasury and mortgage-backed securities] the markets work again.
Now look today. These markets work well, so the reason for acquiring the assets is no longer relevant.
I am in favor of moving towards a tonic reduction process sooner rather than later. When exactly that happens, the committee has to decide. I hope that sometime this year we can start the volume reduction process.
Once we start it, I think we keep it simple, point out in advance what we do to minimize the risk of having a conical rage and just start the process and let it last between eight and twelve months.
Q: Do you think it’s appropriate to announce plans to start slowing down at this upcoming FOMC?
A: This has not been decided and I prefer not to comment.
Q: What forecast do you have when interest rates will rise and the factors that will determine it?
A: My forecast is for the end of the 22nd or the beginning of 2023. If you start this reduction process, let this sink into the economy and see how the markets react.
I am concerned that the risks for higher-than-expected inflation are high and I would therefore like to leave open the option of a rate hike. But again, that depends on the state of the economy.
Q: Were there any changes in your forecast on policy rates, compared to previous forecasts, in June or March?
A: Not for me, no.
Q: Why is there a high risk of higher inflation?
A: One of the real advantages of the federal reservation system, in our decentralized nature (the 12 reserve banks), is that we spend a lot of time in our communities talking to people. And one thing I’ve picked up on is that supply chain disruptions that cause much of the inflation problem may last longer than we initially expected.
What we hear is due to the chip problem, [and] other issues, that people are now starting to plan for longer supply chain outages than they had initially anticipated even six months ago.
I just had a meeting this morning with a group of business leaders and they clearly see the wage pressures they feel [are] they will not leave in the short term, they will have to continue to raise wages.
My benchmark forecast is to keep inflation around 4% this year, which will end this year, and then start to fall back to 2% during the years 2022 and 2023. However, I see a high risk that inflation may rise .
I would like to start the size reduction process soon, so that we can finish the volume reduction process, so that if we have to increase the policy rate, we have a chance to do so. And I think we have to buy ourselves that option.
Q: Some say raising the inflation target will help achieve maximum employment. How do you see it?
A: I totally agree with our monetary policy framework, where the inflation target is 2% and we do it on average and we allow inflation to exceed 2% over a period of time, in periods when inflation has exceeded the 2% target.
We will go above 2%. This is good, given our new political framework. We simply need to minimize the risk that it does not significantly exceed 2%.
It is hard for us all to remember what life was like before the pandemic, but we had a very good labor market, very tight, with a 2% inflation target.
So I don’t think we need to raise the inflation target.
P: President Powell said the Federal Reserve has the tools to deal with inflation, if inflation is higher than expected. Is there a risk that it is too late?
A: There is always this risk, given that there is obviously a significant lag in monetary policy. At this point, I don’t think the risk reaches the level where we need to act immediately
Q: What is your opinion on the risk of financial instability if unprecedented monetary easing occurs?
A: Financial markets are in good shape, but there are risks.
The unregulated or shady banking sector, in some pockets there are some external risks. In my view, they do not rise to the level of anything for which we should act, other than what I believe, the sooner we will be able to normalize the policy and the type of policy and our asset purchase program, we are better off trying to minimize the risks of financial stability.
The piece of financial stability makes you want to move forward sooner rather than later when you start the reduction process.
Q: Some economists say that monetary relief widens economic inequality. What do you think about that?
A: This is a very complex issue. It is a topic in which we, our economists, spend a lot of time understanding.
I think the roots of inequality go far beyond monetary policy. If people had assets, they would benefit from rising asset prices, but they don’t have them for a wide variety of reasons, because of the history of the United States and some of the structural inequalities that we have, I mean I have to be honest.
Therefore, I believe that long-term solutions will not only increase the political rate, because this will not solve the problem. The problem, fundamentally, is to have a more equitable distribution of wealth in our society. And doing so is a very complex task, but one that we must understand.
Q: How will the delta variant COVID-19 affect the economy?
A: Fears in March have come true regarding the delta variant and other striking variants. We are seeing people moving away from air travel, there is a certain setback in hospitality and leisure because [of] the fear factor of the virus.
Even before governments imposed restrictions, families and individuals began making decisions they felt were in their family’s best interest, and they didn’t go to the restaurant, they didn’t make the trip.
We need to vaccinate Americans, and really the whole world, so that we can learn to live with this virus, go ahead, learn to control it, and so that our economy can reopen completely.
Q: Do we need a digital dollar?
A: It is an area that some of our economists have been researching a lot. Like anything in life, there are pros and cons, and we’re trying to figure out what those pros and cons are.
I don’t think we are ready to move in that direction right now, but we need to consider if a digital currency of this central bank were to be implemented, what would it do, for example, with the US banking system? What would you do with other US institutions? This is what we are trying to understand.
Q: Do you think Powell should be named new president by the Biden administration?
A: That is the president’s decision [Joe] Biden, so I’m not going to comment on what I should or shouldn’t do.
I can say for myself personally, that I have great respect for the Powell presidency. I think he is a consummate professional who mixes deep analytical skills, but who also addresses the problems we face with a practice, a business, inclined, given his experience as an entrepreneur.