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Philly Fed CEO: Inflation could last longer than hoped

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Federal Reserve Bank of Philadelphia President and CEO Pat Harker, seen in this 2020 file photo, addressed the New Castle County Chamber on Friday. | DBT FILE PHOTO

WILMINGTON – As the country continues to deal with COVID-19 cases amid a delta variant surge and supply chains around the global recoil from last year’s shutdown, Patrick Harker, president and CEO of the Federal Reserve Bank of Philadelphia, sees reasons to be concerned about the longevity of higher inflation, even if it doesn’t run out of control.

“I’m actually more concerned than I was six months ago that it may not be as transitory as I thought,” he told the New Castle County Chamber of Commerce in a luncheon Friday. “There may be some longer-lived reasons why we have these sticky supply chains we can’t seem to solve in the short or medium run.”

Harker, who also served as president of the University of Delaware from 2007 to 2015, said that he sees “pretty severe” constraints in the supply chain, especially computer chips. He noted that one regional homebuilder reported to his office that they were installing used appliances in new homes, with a promise to replace them in the future, as inventory has dried up.

Harker also emphasized that while some products prices, like lumber and used cars, have started to stabilize from bigger hikes in the early summer, they are still a bit higher than where we were pre-pandemic.

“I talked to a good friend who runs an international shipping business and he said, ‘It’s going to be years before we can sort of get things back to where they were,’” Harker said.

The pandemic exposed “how fragile the supply chain system is across the world,” Harker said, noting that policy and business leaders would now be challenged to build more resiliency into supply chains, product by product and industry by industry moving forward.

Concerns about the longer-term impact of supply chain constraints and their effect on inflation have convinced Harker that it’s time for the Federal Reserve to begin tapering back its $120 billion monthly purchases of assets like Treasury bills and mortgage-backed securities.

“I am perfectly content with us starting this by November, and then running it pretty quickly – that is trying to stop the asset purchases by next summer,” said the Fed president who serves on the important Federal Open Market Committee but isn’t currently a voting member. “That gives us some policy space. I’d like to get that done before we consider raising the Fed fund rate.”

Despite those lingering concerns, Harker is still projecting an overall inflation rate of about 4% for 2021, with a drop to above 2% next year and at 2% in 2023. He also expects unemployment rates to continue to decline as the 11 million job openings, offering a 4% higher wage on average, are filled over coming months.

“I actually think, given the increase in wages that we’ve seen, we’re going to start to see more people coming off the sidelines into those jobs,” he said, while noting that other barriers to work still need to be addressed, including more childcare resources for families so parents can go back to work. “It’s not just the money issue, it’s a ‘Who’s going to take care of my kids’ issue.”

When asked about what sectors he sees as strengths and weaknesses in the region and in Delaware, Harker noted the explosion of growth in life sciences – an industry that was highlighted in a new state report released this week.

“We have built a strong base of fundamental research over many decades and it is now paying off across the region,” he said, noting that universities like UD have helped bolster that foundation.

Harker said that he didn’t see many industries that he thought would struggle moving forward, including the hospitality and tourism industry, which was battered last year, saw gains in patronage this year and has dealt with a widespread labor shortage.

“Hospitality and tourism will sort itself out. We’re still a very attractive region, so I don’t worry too much about that,” he said.

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