Fed’s Harker says bank must ‘be careful’ fighting inflation

Patrick Harker, president of the Federal Reserve Bank of Philadelphia, said Tuesday the central bank is attempting to quell record high inflation without derailing an otherwise strong economy.

In a recorded interview for The Hill’s “Future of Jobs” Summit, Harker said the Fed needs to strike a careful balance between staunching rapid price growth and pushing the economy into a slowdown.

“The economy is strong,” Harker said, citing the gain of nearly 1.7 million jobs in 2022 and a record stretch of economic growth last year. 

“We’re seeing lots of good signs,” he continued. “What we don’t want to do is ruin the good things by being too aggressive in terms of inflation. We need to take action but need to be careful at the same time.”

Harker’s comments come amid increasing concern among some economists and investors with the Fed’s ability to stop soaring inflation without triggering a recession. 

Consumer prices rose 8.5 percent over the previous 12 months and 1.2 percent in March alone, according to consumer price index (CPI) data released Tuesday by the Labor Department. 

While the war in Ukraine drove much of March’s increase through higher prices for food and fuel, inflation rose broadly throughout the economy and in sectors with little direct exposure to supply chain issues.

Harker said he was “very worried” in particular about a steep increase in gas prices, which “disproportionately hits the low- to moderate-income families.”

“To the extent we can do something about that at the Fed, that is to start to bring inflation down. We need to do it and we’re taking action and I’m very supportive of the action,” he said.

The Fed aims to keep prices stable and the job market strong by moving its baseline interest rate range, which banks use to set borrowing costs for mortgages, auto loans, credit cards and other products. Raising interest rates is intended to slow the pace of the economy when inflation is on the rise, while cutting interest rates is supposed to stimulate the economy in times of stress.

The Fed raised its baseline interest range in March by 0.25 percentage points, almost two years to the date it zeroed-out borrowing costs during the onset of the pandemic. The Fed is expected to hike interest rates at least six more times this year, but could accelerate that pace by hiking in larger increments in the coming months.

The Fed’s next monetary policy meeting is in May, and the bank is expected to raise rates by 0.25 to 0.5 percentage points. But some economists and policymakers fear the Fed will need to hike rates so aggressively to tame inflation, the higher borrowing costs could slow the economy into recession.

Fed Chair Jerome Powell and other officials have acknowledged the Fed likely waited too long to hike interest rates, but believe the economy is strong enough to withstand higher borrowing costs. Along with rapid job growth, the U.S. economy had roughly two open jobs for every jobseeker, rising consumer spending and steady wage growth in the face of high inflation.

The Fed had been reluctant to hike rates and slow the economy with thousands of Americans yet to return to the workforce, but Powell has since called rising inflation the biggest threat to further job gains.

Harker expressed confidence that the Fed’s future interest rate hikes and plans to reduce its bond holdings would help bring inflation back down to the bank’s 2 percent annual target by next year. 

Even so, he said the Fed has little power over larger structural issues keeping inflation high and some workers on the sidelines. Harker cited COVID-19-related shutdowns in China, the war in Ukraine and hiring troubles in key service-sector industries as threats to further inflation beyond the Fed’s control.

“They’re more difficult to deal with. We have to soldier our way through this, and we will,” Harker said.

Harker also urged employers to invest in building up the skills of the workforce to vacant jobs, particularly in the service sector. While labor force participation has improved in recent months, the U.S. economy is still short thousands of workers from pre-pandemic levels.

Harker said businesses should focus on the skills a potential employee brings to the table rather than their experiences and make efforts to draw workers in creative ways. He cited a resort in the Pocono Mountains, within the Philly Fed’s district, that began building affordable housing to attract workers who could not afford to move to the area. 

“In field after field, you can just see the shortage and how important it is for us to really focus on getting people into the labor market with the skills that will make them successful,” he said.