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WASHINGTON / NEW YORK – The Federal Reserve will convene the Federal Open Market Committee on September 21-22, where all eyes will be on whether the U.S. central bank will begin to slow the pace of its monthly bond purchases.
Fed Chairman Jerome Powell said the reduction would likely begin before the end of the year.
Nikkei spoke with Patrick Harker, president and CEO of the Federal Reserve Bank of Philadelphia, to get his take on the schedule.
The edited excerpts follow:
Q: Jobs in August were below market expectations and saw a significant slowdown from July. How do you think this will affect the discussion of speed reduction at the Federal Open Market Committee meeting?
A: There is no sense in my mind that there is a lack of demand. If you watch the latest JOLTS [Job Openings and Labor Turnover Survey] data, we have a record number of vacancies. [The problem] is not a lack of demand; it’s supply issues.
Supply problems are due to a multitude of factors, but above all it is the people, whether they are worried about their children or the care of the elderly, or whether they are afraid of returning to work or taking care of the elderly. public transport in large cities. to get to the workplace.
Does monetary accommodation, as provided through large-scale asset purchases, affect supply? No, it affects demand.
At the start of the pandemic, as the Federal Reserve provided unprecedented support to the economy, one of the things we did was restart our large-scale asset purchases, in order to do two things. One is to provide monetary accommodation. The other was to get the [treasury and mortgage-backed securities] the markets are functioning again.
Now let’s see today. These markets are working well and this reason for buying assets is no longer relevant.
I am in favor of adopting a reduction process as soon as possible. When exactly that happens, the committee must decide. I hope this year we will be able to start the reduction process.
Once we get started, I think we keep it simple, we signal well in advance what we’re doing to minimize any risk of a tantrum, and we just start the process and let it go on for eight to 12 months. .
Q: Do you think it’s appropriate to announce plans to start declining at this next FOMC?
A: It has not been decided, and I prefer not to comment on it.
Q: What is your prediction of when interest rates will be raised and the factors that will determine it?
A: My forecast is the end of 22 or the beginning of 2023. If you start this shrinking process, let it trickle down to the economy and let’s see how the markets react.
I am concerned that the risks of higher than expected inflation are high, so I would like to leave the option of a rate hike open. But again, it depends on the state of the economy.
Q: Was there a change in your forecast for key rates, compared to previous forecasts, in June or March?
A: Not for me, no.
Q: Why is there a high risk of higher inflation?
A: One of the real advantages of the Federal Reserve System, in our decentralized nature – the 12 reserve banks – is that we spend a lot of time in our communities talking to people. And one thing I took away is that the supply chain disruptions that cause much of the inflation problem may last longer than expected.
What we hear is because of the chip problem, [and] other issues, that people are now starting to plan for longer supply chain disruptions than they originally anticipated even six months ago.
I just had a meeting this morning with a group of business leaders, and they clearly see that these wage pressures that they are feeling [are] not disappear in the short term, that they will have to continue to raise wages.
My basic forecast is still to have inflation around 4% this year, ending this year and then starting to fall back to 2% during the years 2022 and 2023. However, I see a high risk that inflation could. to augment.
I would like to start the phase-down process soon, so that we can complete the phase-down process, so if we need to increase the policy rate, we have the option to do so. And I think we have to buy ourselves that option.
Q: Some say that increasing the inflation target will help achieve maximum jobs. How do you see it?
A: I fully support our monetary policy framework, where the inflation target is 2% and we average that value and allow inflation to go above 2% for a period of time, in times when the inflation exceeded the 2% target.
We will exceed 2%. This is a good thing, given our new policy framework. It suffices to minimize the risk that it does not significantly exceed 2%.
It’s hard for all of us to remember what life was like before the pandemic, but we had a very good, tight labor market with an inflation target of 2%.
So I don’t think we need to raise the inflation target.
Question: President Powell said the Federal Reserve has the tools to deal with inflation if inflation is higher than expected. Is there a risk that it is too late?
A: There is always this risk, given that there is obviously a significant delay in monetary policy. At this point, I don’t think the risk is at the level where we need to take immediate action
Q: What do you think about the risk of financial instability amid unprecedented monetary easing?
A: Financial markets are doing pretty well, but there are risks.
The unregulated banking sector or shadow banking, in some pockets, there are external risks. In my opinion, they do not reach the level of everything that we would need to take action on except that I think the sooner we can normalize the policy, the key rate and our asset purchase program, the better off we would be to minimize the risks to financial stability.
The financial stability part of this makes me want to start the downsizing process as early as possible.
Q: Some economists say that monetary easing increases economic inequality. What do you think about that?
A: It is a very complex subject. This is an issue that we, our economists, spend a lot of time understanding.
I think the roots of inequality go far beyond monetary policy. If people had assets, they would benefit from rising asset prices, but they don’t have those assets for a whole host of reasons, due to the history of the United States and some of the structural inequalities that we have. have, I mean we have to be honest.
So I think the long term solutions are not just to raise the policy rate because that will not solve the problem. The problem, fundamentally, is to have a more equitable distribution of wealth in our society. And doing that is a very complex task, but one that we have to understand.
Q: How will the COVID-19 delta variant affect the economy?
A: March fears have come true when it comes to the delta variant and other variants that are hitting. We are seeing people withdrawing from air travel, we are seeing a certain decline in hospitality and leisure because [of] the fear factor of the virus.
Even before governments imposed restrictions, families, individuals, began to make decisions that they felt were in the best interests of their families, and not to eat out, not to travel.
We need to vaccinate Americans, and really the whole world, so that we can learn to live with this virus, in the future, learn to control it, and so that our economy can fully reopen.
Q: Do we need a digital dollar?
A: This is an area in which some of our economists have done a great deal of research. Like everything in life, there are pros and cons, and we try to spell out what those pros and cons are.
I don’t think we are ready to go in that direction yet, but we need to think about setting up such a central bank digital currency, what it would do, for example, to the banking system in United States? What would that do to other institutions in the United States? This is what we are trying to understand.
Q: Do you think Powell should be re-elected as president by the Biden administration?
A: It’s the president’s decision [Joe] Biden, so I’m not going to comment on what he should or shouldn’t do.
I can personally say that I have great respect for President Powell. I think he is an accomplished professional who combines both deep analytical skills, but also issues that we face with a practice, a business, an addiction, given his background as a businessman. .
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