WILMINGTON – The chief executive of the Federal Reserve Bank of Philadelphia said Friday that he continues to believe that the national economy will avoid a recession and that the Fed can avoid further interest rate hikes under current conditions.
Patrick Harker, speaking to the Delaware State Chamber of Commerce, said that “disinflation is under way. Economic activity has been resilient. Labor markets are coming into better balance.”
“Moreover, these conditions aren’t just where I see the national economy but also our regional economy and … Delaware’s,” said Harker, who previously served as president of the University of Delaware before moving to oversee the region’s Fed bank and currently serves as a voting member of the all-important Federal Open Market Committee (FOMC) that sets the benchmark interest rate.
The FOMC has voted to raise the nation’s interest rate 11 times in the last two years, pushing it to a 22-year high of a range between 5.25% and 5.5%. In September, however, the committee voted to hold the interest rate range rather than increase it, while it monitored data related to inflation.
“I do see a steady disinflation underway, and I expect it to continue, with inflation dropping below 3% in 2024 and leveling out at our 2% target thereafter,” Harker said Friday. “By doing nothing, we are still doing something. And, actually, we are doing quite a lot.”
Raising interest rates, and therefore making lending more expensive for borrowers, curtails business expansions, car buying, homebuilding and more that could continue to fuel inflated costs. The Federal Reserve has said that it would keep interest rates at their historically high level until meaningful disinflation was observed.
“We are also giving ourselves a chance to navigate some of the current uncertainty — labor strikes, oil prices, and the not-fully-exorcised specter of a government shutdown included,” Harker said. “I do subscribe to the new moniker, ‘higher for longer.’ I didn’t coin it, but my expectation is that rates will need to stay high for a while.”
“We will not tolerate a reacceleration in prices. But … I do not want to overreact to the normal month-to-month variability of prices,” he added.
Despite a nagging inflation rate, the economy has proved to be resilient, and Harker expects gross domestic product gains to continue through 2023 while moderating slightly next year without contracting.
“At this point, we think that this soft landing we’ve been talking about is quite possible,” he said.
On the jobs front, Harker said he anticipated national unemployment to end the year at about 4% — or about 20 basis points higher than the September rate — and to increase slowly over the next year to peak around 4.5% before heading back toward 4% in 2025. While higher than current levels, Harker said that was a natural level of unemployment that would historically support a sought-after 2% inflation rate. He added that it would not result in mass layoffs, but be the byproduct of more people coming and going from the labor force.
In looking at the economy, Harker said he is especially concerned about the future of commercial office space, in part because it’s an important part of downtown urban economies, but also because of the exposure to real estate values by banks, investment trusts and individuals. Declining value of commercial real estate because tenant employers choose to move workers remote could have widespread ripple effects in the economy.
“We are worried about particular community banks who may have an outsize exposure to some commercial office space,” he said.
The Fed is also watching personal credit lines, where defaults are starting to tick up as inflation holds and pandemic-era support funds have been exhausted.
“It’s not really a major concern right now; it’s kind of really back to where we were pre-pandemic, but the trajectory is moving pretty quickly. So, whether that levels off or not is something we’re very, very carefully watching,” he explained.
In the housing market, Harker is also watching a slow-down in sales as average mortgage rates have risen to more than 7% and priced some buyers out of the market. Other homeowners who may have wanted to sell are also still on mortgages with 3% interest rates or less, keeping potential starter homes off the market and therefore driving up median home prices, he said.
“We’re hearing from the banks that particularly for first-time homebuyers, there is simply no activity going on,” he said.
