A year after the COVID-19 pandemic closed down much of the American economy, Patrick Harker, president and CEO of the Federal Reserve Bank of Philadelphia, has reason to be hopeful in year two of the public health crisis.
Vaccination efforts are ramping up nationwide and hiring and spending numbers are rising as well, leading the region’s top fiscal analyst to estimate gross domestic product (GDP) growth as high as 6% this year.
Harker, who also served as president of the University of Delaware from 2007 to 2015, offered his outlook to state leaders in a Tuesday presentation to the Delaware State Chamber of Commerce. Afterward, he sat down for a one-on-one interview with the Delaware Business Times.
The following has been edited for clarity and brevity.
How do you see the remainder of 2021 playing out and did today’s report around the Johnson & Johnson vaccine change that outlook at all?
It’s going to be a bumpy road. It’s not going to be a straight line back to recovery. We never anticipated that, and I think that’s what we’re seeing.
The news about Johnson & Johnson is concerning from an economic point of view, mainly because it may just fuel more vaccine hesitancy. We already have vaccine hesitancy within our communities. And that is the issue I’m really focused on because if we don’t get the vaccine into people’s arms in sufficient numbers to achieve herd immunity, we can’t fully open the economy.
So, I am concerned and have been for a while now, that vaccine hesitancy … is going to possibly create more bumps in this road back to full recovery.
Have you had to become a kind of public health expert in terms of forecasting out the economy? Are you leaning on different federal agencies or sources to help give you an idea of some of those metrics as well?
I’m not attempting to become a public health expert, but our region is blessed with many public health experts at universities and in the leading health systems that we have. We reach out to them on a regular basis to get information and hear what they are seeing on the ground. That information is invaluable and helps us form our opinions.
We have been hearing increasing worries from some about the prospect of inflation, especially as Congress has now passed several trillions of dollars in stimulus. Do you see costs ticking up this year?
We just got a report over the wire, where we did see an uptick in inflation – some of that was predicted from a technical perspective. If you remember what happened in February and March, things were shutting down, so prices for certain goods did fall. So, we knew that there was going to be a percentage increase relative to that. We are also seeing increases in housing costs, some energy costs, etc.
But at this point this is, in my view, not out of control in any way. Our estimate this year is that we’ll hit our preferred measure of inflation at 2.1%. If inflation rises above those numbers in a substantial way, then we have tools to deal with that. While I understand the concern because of the large fiscal stimulus that’s entering the economy, at this point, that risk needs to be balanced off with the risk of taking pre-emptive action before we see inflation rising.
We’ve committed as the Federal Open Market Committee to let inflation average 2% and in order to average it, it has to go above 2% for a period of time.
Where does your worry about inflation begin then?
It’s not just the level but also the rate of change of inflation, the velocity of inflation. If it gets to 2.5%, or maybe even goes above that for a little bit, but it’s just hovering there, that’s very different than quickly reaching 2.5% and accelerating past. You have to look beyond just the level and also look at the velocity.
Economics 101 tells us that lower unemployment should drive higher inflation, and vice versa, but certainly in the last couple years that wasn’t the case. What do you attribute to that?
That is a topic that is debated widely within the economics profession. One argument that I have some sympathy for is that because we – the central banks of the world – clearly say, either explicitly or implicitly through our actions, that we are going to have a 2% inflation target, then the markets believe it.
Some of inflation is a self-fulfilling prophecy. If people believe it’s 2% and they believe that we are committed to keeping it around 2%, then inflation expectations are pegged at 2%. So, no matter what happens on unemployment, people still think inflation is going to be moving around 2%.
That’s kind of what’s happening right now. The credibility of the Fed is high so people believe we will do what it takes to keep inflation under control, and as a result, people act like inflation is under control.
As we keep spending trillions of dollars, we’re starting to hear more discussion from Congress about deficit spending, and the fact that the U.S. seems to keep digging a deeper hole in terms of its fiscal deficit. Is there a point where you begin to be worried about it?
You want productive investments in the economy. We need investments in infrastructure, and that’s “infrastructure” broadly including broadband, childcare, etc. There’s a lot of things we need investments in along with roads and bridges.
What you’re betting on is that those investments will pay off over time with higher productivity, and they will if you do them right. Higher productivity means the economy’s going to be on a growth path, with more tax revenue coming in. That’s what we saw in the ‘90s when we zeroed deficits.
Right now, we’ve got to dig ourselves out this hole. On one hand, we may be digging a longer-term hole, but we have to do what we have to do to get ourselves out of this hole. Once we climb out of this, I think prudent investments in productive capacity makes sense, but at some point, we also need to make sure that we have our fiscal house in order.
But right now, let’s just get through this period.
A year ago, you told state leaders that you were most worried about the commercial real estate sector in the wake of the pandemic and now we’re starting to see some office vacancies and subleasing creep up. What’s your outlook for the commercial real estate sector today?
I think it’s a story that hasn’t completely been written yet. It’s one we’re watching very carefully. It’s not commercial real estate broadly either, you have to really look at the subsegments.
Retail has clearly changed. I think there are longer-term trends that this pandemic has accelerated. One of those is online shopping and the way we’re just shopping differently. That doesn’t mean your brick-and-mortar is dead completely. It’s not, but it’s probably going to be a different mix.
In the case of office space, we don’t really know what the future of work is. For some companies, it may be all remote although many companies that initially thought they would be all-remote are now saying they need a hybrid model because it’s hard to create culture.
Culture is a very important part of a company, and it’s hard to build it, maintain it and to instill it to a next generation of workers unless you have some real face time and you have those serendipitous moments in the hallway or in the coffee shop.
Are you worried about the trickle-down effect on small businesses, especially those in commercial centers, if more office employers start to adopt work-from-home models or hybrid models?
We’re already seeing it. In downtown Wilmington or Philadelphia, the lack of foot traffic because employees aren’t there is really devastating to those local businesses. Thank goodness for the federal PPP loans that help many of those institutions stay alive through this period. The whole goal of things like the Payroll Protection Program was to try to maintain as much of the economic infrastructure, those small businesses, as we could.
Minority-owned small businesses have really taken this particularly hard. There’s an effort underway really across the Greater Philadelphia region, including New Castle and other parts of Delaware, to really make sure that we can do what we can to help those institutions through this very tough period.
Do you still think the greater Wilmington market or Delaware overall can see some benefit from workers relocating from neighboring areas to take advantage of remote working opportunities?
Cities like Wilmington still have real opportunities, but there are things that we know have to happen. It’s not only the job that’s available – it’s the infrastructure, the transportation access and the amenities, the quality of life, the cultural scene, restaurants, etc.
And I know this has been a real focus of the greater Wilmington business community and the Delaware business community more broadly. I would just encourage them to keep thinking about that because those quality-of-life issues are what drive people to a community or in some cases drive them away.
With an administration ready to move toward a carbon-neutral economy and automation changing legacy businesses, is there a role that the Fed can play in helping to ensure workers in affected industries have the ability to find new work?
The Federal Reserve is obviously not directly involved in job training and workforce retraining, but what we can do is help through our research.
That’s what we’ve done with our Occupational Mobility Explorer, which shows what is possible. That tool can show you not only how you can increase your salary, but it can actually play it out over a couple of different job changes. It will also show you, in your region, whether those jobs are increasing or decreasing.
You touched on something that is of concern to me, however, which is more cultural.
I’m from a family of pipefitters and steamfitters, that was our family trade. So, the idea of that thing being pulled out from under us, or we’ve got to go do something different [is difficult]. You may not believe you have the skills, but you do have skills and they’re transferable.
Part of this is just really educating people through a variety of channels, probably most impactfully the communities in which they live and work, that they have these opportunities, and they have the skills. I think we really need an effort to change some of this culture.
Do you see the drive toward this clean-energy economy ramping up over the next few years, certainly over the term of the Biden administration?
Yes, and this is an area we invested in heavily when I was at the University of Delaware. It’s an area that has tremendous potential. Never underestimate the innovation and ingenuity of American scientists, engineers, people, and community leaders.
I believed that when I was at Delaware and set up a series of research programs in this area, and I believe that even more today. We can create a very different future with new technology, but the challenge will be to do it in a way that the people who get hurt in this transition, get taken care of somehow.
Do you think that communities that perhaps slow roll a move toward that carbon-neutral economy put themselves at risk of being left behind when the economy does begin a more substantial transition?
People should be thinking about this, and I think there’s tremendous upside and growth industries that can emerge out of this. It’s just really leaders in those communities leading and seeing that opportunity and figuring out within their own context how to seize it.
