Fed’s Harker Supports Smaller, 25-Basis-Point Hikes ‘Going Forward’

(Bloomberg) — Federal Reserve Bank of Philadelphia President Patrick Harker said the central bank should lift interest rates in quarter-point increments “going forward” as it approaches the end point in its most aggressive tightening campaign in decades.

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“I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed,” Harker said in prepared remarks Thursday for an event in Malvern, Pennsylvania. “In my view, hikes of 25 basis points will be appropriate going forward.”

Fed officials raised rates by half-point last month. This slowed the rate of rate increases after four consecutive 75-basis-point moves. The rate hike brought the target on the Fed’s benchmark rate to a target range of 4.25% to 4.5%, up from near zero levels in March.

According to projections by policymakers, Fed officials expect interest rates to rise above 5% this year and stay there until 2024. Other Fed officials indicated that they are open to a 25-basis-point increase in the rate at their next meeting, which will be held February 1, depending on data. The Fed’s policymakers insist that they have more work to do to manage prices and don’t anticipate any rate cuts in the coming year.

Harker, who participates in monetary policy decisions, said that officials expect to keep rates higher to allow for economic growth. “At some point this year, I expect that the policy rate will be restrictive enough that we will hold rates in place to let monetary policy do its work,” he said.

The Fed official said he is not forecasting a recession, though he does expect the US economy to grow by about 1% this year before rising to “trend growth” of about 2% in 2024 and 2025. He predicts the unemployment rate rising to around 4.5% this summer and dropping to 4% the following two years.

Harker answered questions following his speech and was more specific about the rate he supports.

“I’ve been in the camp that we need to get rates above 5%. What is the limit? We’ll let the data dictate that,” he said. “But I don’t think we need to get much further than 5% at this point. And then sit for a while so that we’re not causing undo harm to the labor market.”

Harker said he was also in the “camp of being cautious” who prefer to move carefully to avoid unnecessary damage to employment.

“I don’t think we have to overdo the monetary policy response,” he said, while adding that Americans also need to understand that inflation is going to take a couple of years to get back down to the Fed’s 2% target.

“I think we have to just accept that. But as long as it’s moving in the right direction, we’re making progress,” he said. “As long as we’re getting, moving in the right direction, I think we should be more cautious than more aggressive.”

(Updates with Harker comment during post-speech Q&A in final five paragraphs.)

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