Philly Fed Chief Harker: Inflation running ‘far too high’

Philadelphia Fed President and CEO Patrick Harker, seen here in February 2020 before the pandemic struck, recently said that inflation was running “far too high” for the comfort of the nation’s monetary policy leaders. | DBT PHOTO BY JACOB OWENS

WILMINGTON – While optimistic about recent robust job growth, Patrick Harker, president and CEO of the Federal Reserve Bank of Philadelphia, said that “inflation is running far too high” in a Wednesday speech at the Delaware State Chamber of Commerce.

“When I addressed this group almost exactly a year ago, I called the economic recovery, both nationally and here in Delaware, a ‘work in progress,’” he said. “I think that still holds. Economic growth and employment are robust, but I’m very concerned about inflation.”

The consumer price index (CPI) was up 10% annualized in February, led by another significant increase in energy prices. Core CPI, stripping out energy and other volatile indicators, also remains very high as well, with 6.2% annualized growth in February.

Harker said that he expected Russia’s invasion of Ukraine to add to inflationary pressure, not only hiking oil and gas prices but other commodities, like wheat and fertilizer, as well.

After the Federal Open Market Committee (FOMC) raised the nation’s base interest rate by 25 basis points last month, its first increase since 2018, Harker said he expects “a series of deliberate, methodical hikes as the year continues and the data evolve.” He also favors the Fed trimming its more than $9 trillion balance sheet of Treasury securities, agency debt, and mortgage-backed securities, which it acquired during the pandemic to prop up the economy. His comments echoed those made by colleague Loretta Mester, president and CEO of the Federal Reserve Bank of Cleveland, at a February event at the University of Delaware.

Harker is currently an alternate voting FOMC member, filling in while the Boston bank awaits a permanent leader this summer. He believes “inflation should begin to taper this year but remain elevated.” While fraught with uncertainty, he estimated that inflation would end 2022 around 4% and fall closer to the target of 2% over the next two year.

While significant concerns remain around inflation, the impact of the Russian-Ukrainian war, the post-pandemic changes to work and the acute needs of child care, Harker did note that the country and state has seen some good economic news of late. In 2021, U.S. GDP growth was a very healthy 5.7%.

“That this occurred in the midst of a deadly pandemic is quite a testament to the underlying strength of our economy,” he said, also noting that for 11 straight months, new job creation has topped 400,000.

While job openings continue to remain elevated at near record levels, Harker said he expects the waning of the virus, uncertain equity markets and even inflation may lure people back into the workforce and persuade others to delay retirement.

In Delaware, Harker, who is also a former University of Delaware president, noted that the unemployment rate is nearing pre-pandemic levels, overall gains in payroll employment have been steady, labor market conditions are tight, and the housing market remains hot. While total employment in Delaware is now about 14,000 jobs below pre-pandemic levels, he noted some industries, like financial services, have already fully recovered, while others like leisure and hospitality remain somewhat depressed.

As he has said in other presentations since the start of the pandemic, Harker said one of the biggest question marks of the future hangs over commercial real estate.

“I do see the potential for a significant uptick in the service sector in many large cities that are only now waking up after a two-year pandemic-induced hibernation. Central business districts in cities like New York, San Francisco, Philadelphia and Wilmington should get a boost as more workers return to their offices. The rise of hybrid work may moderate the potential for a huge boom, however,” he said.

In a question-and-answer session following his speech, Harker was asked about the workforce and food prices that will soon hurt beach economies as they enter their prime seasons. He acknowledged that the war in Ukraine would likely continue to inflate wheat prices and supply chain disruptions could impact others.

Meanwhile, a continued decline in visas for foreign workers will hurt Delaware beach communities that have come to rely on thousands of workers coming primarily from Eastern Europe. Local replacements for that workforce did not materialize last summer.

“There’s a major resort in the Poconos that I recently learned about where they are adding on to their facility a 100-bedroom facility for workers, because it’s not only finding people who can get the visa, but, particularly in the beach communities, housing is extremely expensive, particularly if you’re working at minimum wage or slightly above minimum wage. So it may be that it’s the housing issue as well that has to be addressed, not just the visa and salary issues,” he said.

Editor’s note: This story originally reported that Harker was not a voting member of the FOMC. While he won’t be a permanent voting member until next year, he is currently voting on policy as an alternate for the Federal Reserve Bank of Boston.