Patrick Harker, president of the Philadelphia branch of the Federal Reserve, said he would support more than three interest rate rises this year if inflation surges higher as he became the latest US central bank official to throw his weight behind an increase in March.
“I currently have three increases in for this year, and I’d be very open to starting in March,” Harker said in an interview with the Financial Times. “I’d be open to more if that’s required.”
The Fed official’s comments follow inflation data for December that showed the US consumer price index jumping 7 per cent year-on-year for the first time since 1982 — a reading Harker described as “very high, very bad”.
Harker is one of several Fed officials to signal support for “lift-off” in March, along with other regional bank presidents including Esther George of Kansas City, James Bullard of St Louis and Cleveland’s Loretta Mester.
Comments from Fed chair Jay Powell at his confirmation hearing this week suggested he wants the central bank to take quick action to reduce the amount of stimulus it is pumping into the world’s largest economy.
The increasingly hawkish stance from the central bank has prompted investors and economists to pull forward their forecasts for the first rate increase.
Harker, who will be a voting member of the Fed’s rate-setting committee next year, said the central bank had few tools to combat supply chain problems that are fuelling inflation but that it should act to temper consumer demand.
“We don’t want to put the brakes on completely, but we do need to slow down some of the demand,” he said. “We can do something . . . by raising the fed funds rate.”
Harker said he would also support fewer rate increases if “inflation does in fact start to come down” as supply chain bottlenecks ease. But few independent economists are forecasting the kind of drop off in inflation that would prompt the Fed to adopt a more dovish approach.
Harker warned of a “longer-term problem” if the Fed allows price growth to hover at levels well beyond its target for inflation that averages 2 per cent over time.
“Ultimately, what we worry about is that people start to think, ‘Well, inflation is just not going to be at 2 per cent, it’s going to be at 2.5 per cent or 3 per cent going forward’,” he said.
Harker said the US labour market had recovered sufficiently from the impact of the pandemic to conclude that the Fed’s goal of maximum employment had been met, one of two targets set by the central bank for determining when to raise rates. It is already exceeding its inflation target.
The president of the Philadelphia Fed also indicated he would support a relatively quick effort to cut the size of the US central bank’s balance sheet, which has swollen to $9tn after it hoovered up bonds during the pandemic to stave off economic collapse.
Harker suggested the Fed should move more quickly than it did in the wake of the 2008-09 global financial crash, when it waited for two years after its first post-crisis rate rise before it started to shed assets.
Harker said the Fed could begin the “run-off process” once interest rates were “sufficiently away” from zero, which could mean a reduction in its bond holdings as early as the end of this year.
“I am very much in the camp of communicating over and over how we’re going to do this and then being methodical,” he added.