Fed's Harker Says High Inflation Calls For More Rate Hikes

Federal Reserve Bank of Philadelphia President Patrick Harker said Thursday the central bank is not done with raising its short-term rate target amid very high levels of inflation, while adding it was likely the central bank will find space next year to pause the tightening process and take stock of how its rate increases are impacting the economy.

Given the current inflation situation, "the Fed is actively trying to slow the economy," and "we are going to keep raising rates for a while," Harker said in a speech text. Against the current federal funds rate target of between 3% and 3.25%, "given our frankly disappointing lack of progress on curtailing inflation, I expect we will be well above 4% by the end of the year," Harker said.

But the point is approaching where the central bank will be able to step back and see how the impact of its rate rise cycle is affecting the economy, the official said. "Sometime next year, we are going to stop hiking rates," Harker said, adding "at that point, I think we should hold at a restrictive rate for a while to let monetary policy do its work."

Harker is not a voting member of the rate setting Federal Open Market Committee this year, but he will have a vote next year. The Fed has been raising its short-term target rate aggressively this year to lower price pressures, and it is widely expected to boost the cost of short-term borrowing again at its early November meeting, very likely by another large sized 0.75 percentage point.

Fed officials have penciled in around a 4.6% stopping point for rate rises by next year, but some policy makers and outside forecasters believe a higher rate will be needed given the persistence of inflation.

Harker warned in his speech that while inflation surged very quickly, lowering it will take time, which creates uncertainty for monetary policy.

He noted that if inflation doesn't cool, "we can tighten further, based on the data" next year. He said that as a policy maker, "what we really need to see is a sustained decline in a number of inflation indicators before we let up on tightening monetary policy."

Harker said in his remarks that his economic outlook does not appear to entail a recession. Growth will slow this year on high inflation and tighter financial conditions, with flat activity for 2022 and a 1.5% rise in the gross domestic product in 2023.

What is now a 3.5% unemployment rate will likely rise a full percentage point by next year and then fall to 4% in 2023, the official said. That means "labor markets will stay quite healthy" as the Fed works to lower inflation, Harker said.

Against the current 6.2% year-over-year increase in the August personal consumption expenditures price index -- the Fed's preferred inflation measure -- Harker sees inflation at 6% this year, around 4% next year and 2.5% by 2024.