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Author: Don Obrien

Philadelphia Fed President Patrick Harker speaks with Yahoo Finance [Transcript]


Patrick Harker, president of the Federal Reserve Bank of Philadelphia, joined Yahoo Finance on the virtual sidelines of the annual Jackson Hole symposium to discuss the impact of the Delta variant on the U.S. economy and how the Federal Reserve is responding.

Below is a transcript of his appearance on Yahoo Finance Live on August 27.

BRIAN CHEUNG: Welcome back to Yahoo Finance Live! Obviously all eyes are on that Jackson Hole Economic Symposium being held, virtually this year, but we’re going to get a little bit more color with a Fed official himself. Joining us now here on Yahoo Finance is the Federal Reserve Bank of Philadelphia president, Patrick Harker. President Harker, how are you?

PATRICK HARKER: Very good. Good to see you, Brian.

BRIAN CHEUNG: So let’s get right into it. Obviously, all the commentary kind of coming out of the Fed chairman’s remarks about an hour and a half ago kind of caught my eye that he said, substantial further progress had been made on inflation but the tone of his speech made it sound like maybe he saw a little bit more road to go on maximum employment. I guess I’m wondering, what did you think of Chairman Powell speech, what did you think was the big takeaway an hour and a half ago.

PATRICK HARKER: Obviously these comments are mine and mine alone. I thought [it was a] great speech really laid out, where I think the center of the FOMC is in terms of policy, and I agree with him that on the inflation front, we’ve made substantial progress. I mean we wanted to shoot about 2%, we’ve done that. We can talk more about inflation as we move forward. I’m sure he wanted to talk about that, but I’m comfortable with where we are but there are some risks on the unemployment front, we do have a ways to go, but the question is, and we can talk about this too, ‘is monetary policy the right tool?’ It’s not a demand issue. There’s lots of demand for labor. And that’s what we influence in monetary policy is demand. It’s a supply issue. And that’s what I’m concerned about and that’s why I am in the camp of wanting to taper sooner rather than later.

BRIAN CHEUNG: Got it. Now I guess I wanted to ask as a follow up right there, whether or not the tapering in your head was kind of affected by what we heard from the Fed chairman earlier this morning because on one hand he does. He is the chair of the committee. On the other hand he doesn’t speak for everyone. You do speak for yourself at the Philadelphia Fed, as well, but is there any sort of corralling, especially given the divergence of views on the FOMC right now? Some people being in the camp that ‘it’s time to start tapering in September’ some saying ‘I want to see a little bit more data on the employment front.’

PATRICK HARKER: Yeah, I don’t, I wouldn’t characterize it as corralling. But really, we do have different views, but at the end of the day, the center of the committee really speaks for the committee with respect to policy where the bulk of people are, and that’s evolving. I mean, it should evolve, people’s views, my views, have evolved over time as the data comes in. So now I think we’re reaching consensus that tapering should happen sometime this year as the chair said.

BRIAN CHEUNG: So let’s talk a little bit more about the labor market. So we will get an employment report next week; I guess I’m wondering, what is your expectation for that report which will cover the month of August and how does that kind of shape the economic outlook that you have headed into the next meeting, which will be on September 22?

PATRICK HARKER: For a couple of things, one, we’re going to see what we’ll see is, got a lot more jobs and not yet filling all those jobs right they’re still here and it’s going to be a slowdown.

August to me, is not the month, I’m really looking at September, October. As we start to reopen, schools reopen, daycare centers, which of course, the Delta variant has given us a real problem in that respect. But as people start to feel more comfortable about overcoming some obstacles to going back to work, we should see the labor market continue to heal. Unemployment insurance has rolled off, at least the federal support for that is rolling off, it has rolled off earlier in some states, but we will see some continued healing of the labor market. How quickly, I’m a little concerned about that, especially in the August numbers. Just simply because people still have to deal with having their kids at home or eldercare or other issues related to the virus.

BRIAN CHEUNG: Now I know that you watch a lot of these things very closely, especially on occupational mobility, there’s a lot of churn, you see that in the monthly JOLTs reports. But, I guess I want to fixate specifically on the things that are keeping people out of the labor force right now. Some of these factors might be enhanced on employment insurance, child care, things that should be expected to perhaps fade later this year. Are you already seeing that in the data at least in your district, Pennsylvania, parts of New Jersey, other parts of the third district, or do you feel like you won’t start to see that until the August, September, October report.

PATRICK HARKER: Yeah. So we’re seeing, for example, in the unemployment insurance issue, the state’s who already rolled back the federal support, you know, there were some states that moved early, they’re not seeing a lot of impact in terms of people returning to work. Some but not as much as we might have thought. It’s early, so we don’t really know for sure these are all more in the category of anecdotal [rather] than hard data. But there are other things holding people back. Again child care, people afraid to get on transit. Maybe the workplace is safe for them but they’re afraid to get on transit systems, a whole host of other things. And I do think as we start to get more people vaccinated, we will start to see these barriers to people going back to work, start to fall. Our district, part of the Northeast, because we have high vaccination rates, I would expect would heal faster than other regions. But this gets back to a basic message we all need to deliver. We need to get the vaccines into people’s arms as quickly as possible. That’s the way you heal the labor market. That’s the way you heal the economy.

BRIAN CHEUNG: And I guess that’s a good natural segue into the risks from Delta so the Fed Chairman described as a near-term risk but I’m wondering based off of what you’re seeing in your district because every district is going to be a little bit different in terms of the impact of Delta because it’s a bit regional right now but do you see that as a substantial risk or downside risk, especially to your economic forecasts?

PATRICK HARKER: For us, again, I don’t see it as a substantial downside risk there are sectors like hospitality and tourism, that will be hurt, that you know they were hoping that things are going to come back, and I think they’re going to hurt our district because we have high vaccination rates and generally will be hurt less than other regions of the country.

BRIAN CHEUNG: Now, I guess, is there a spillover impact though I mean if we’re looking outside because there’s some argument, especially within the context of inflation which we’ll get into a little bit later, that if these emerging market countries that are major exporters to the United States are facing shutdowns these bottlenecks could actually end up being larger and longer than anticipated. Is that an element that you’re watching with regards to Delta?

PATRICK HARKER: Oh, yeah. Oh, absolutely. I mean, what I’m hearing from contacts. Absolutely, is that the supply-chain issues may be longer lasting than they thought. One major national homebuilder told me recently that they’re expecting these problems to persist and, for example, they’re putting used appliances at the brand new luxury homes and promising customers that they’ll get a new appliance, when they’re available that they can’t get a new dishwasher.

BRIAN CHEUNG: Got it. Whoa, Well, let’s have a little bit more of a conversation on the other side of this break, we’ll take two quick minutes and we’ll have more conversation with the Philadelphia Fed President Patrick Harker, on the other side of this break. We’ll be right back.

[BREAK]

BRIAN CHEUNG: Welcome back to Yahoo Finance Live, we are joined here on the virtual sidelines of the Jackson Hole Economic Symposium with the Philadelphia Fed President Patrick Harker. Thanks for stopping by. I want to extend our conversation here by taking a look at another big data print that we got this morning that’s on inflation personal consumption expenditures coming in at 4.2% for July. Now, in terms of year-over-year pace, that’s the fastest we’ve seen in over 30 years. Wondering how you processed that report and that data point this morning.

PATRICK HARKER: Yeah, so we knew the inflation numbers were going to be high, we knew that. The question is, how long will this go on, right. Is it transitory or not, that’s the question. And I think there’s a risk that some of this may be baked in longer than we think, given the supply-chain disruptions we talked about before the break. And those are more persistent, than I expected and many people I talked to in the business expected. That said, I mean, the thing to watch, the thing I’m watching, is not just the headline number, but where is this happening, what sectors is this happening in, and is there spillover from what you might consider the COVID affected sectors to the non-COVID sectors. And secondly, are inflation expectations becoming unanchored from our 2% target.

In the latter case that’s not the case, we are seeing them still anchored, but it is clearly a risk that inflation may be running higher than we would like. Now, we’ve said we wanted to run about 2%, with our average inflation targeting, but we don’t want it to run out of control. I don’t see any signs of it running out of control right now, but it clearly is a risk right now, but I’m watching carefully.

BRIAN CHEUNG: Now inflation expectations are really interesting to me because there’s market-based measures through the TIPS [Treasury Inflation-Protected] market, but then there’s also the survey-based measures. But it’s a little bit noisy because inflation is a huge story for the average American consumer, and people are seeing this across the board. But when the Fed’s preferred measure strips out food and energy which, especially for those low income communities, is something that they’ve watched very closely, that’s a big factor. You take a look at pork prices, for example, going up, you’re in south Jersey you might call it pork roll, I’m from the north part, so we call it Taylor ham, but I’m wondering, you know, those are the types of things that people are noticing. How does that factor into, not just what you’re reading on inflation expectations, but how the Fed then interprets what you’re seeing on that front.

PATRICK HARKER: I think clearly in my mind [it] factors and yeah, I’m hearing this from all my neighbors and they clearly are feeling this issue. But we have to look through some of the cyclical, like energy, energy use. It’s highly cyclical, and we have to look through some of that to really look at the underlying equations. That’s the goal, and that’s what we’re trying to do.

That said, there are some risks here that higher inflation may be longer lasting than at least I expected. So we still expect that inflation will be high this year, but then start to settle back down to the 2% target. But in the event that doesn’t happen, we have to change policy.

BRIAN CHEUNG: So when it comes to changing policy you do have the two tools right now, we did talk about tapering already, let’s talk about raising interest rates at some point down the line. Do you have a forecast, you’re gonna have to submit one in the dot plot projection in a month or so, for when you could see that first liftoff happening?

PATRICK HARKER: So you start with tapering, we have to get back to tapering. I would like to see the tapering process end, or basically end, before we think about any kind of Fed fund rate increase. And so I would like to start that sooner rather than later, and move that along briskly, and then we can start to think about, if necessary, and if the economy’s in that position, to raise the Fed funds rate. So given that, we’re talking about probably late ‘22, early ‘23 before we think about any kind of rate increase.

BRIAN CHEUNG: I guess, what does ‘briskly’ mean, within that context. We were speaking with the Dallas Fed President yesterday, who said that he would like to structure a slowing down of the asset purchases, $10 billion a month for the U.S. Treasuries, $5 billion a month for mortgage-backed securities. Do you have a similar framework, given that kind of rough timeline that you outline?

PATRICK HARKER: That’s about right. I mean, I think, what matters is less those details, and I know the market cares about those details, but from a macroeconomic perspective, what matters more is we start this, sooner rather than later, and just move along and be very clear to the markets what we’re doing and why we’re doing it so we don’t surprise the market.

BRIAN CHEUNG: Let’s talk about the framework, which was unveiled last year you’ve had in a year in a completely unprecedented economic shock to test this thing out. [It] still is being tested right now. But what kind of caught my attention was that the Fed chairman had a warning that said that with substantial slack remaining in the labor market, tightening policy too early, preemptively, would be a mistake that could be ‘particularly harmful.’ How do you interpret those remarks with regards to specifically trying to pull in those more low income, oftentimes minority communities back into the labor market as a recovery continues?

PATRICK HARKER: So a couple things. One, we need to think of policy as a one-two punch to the tapering, and then the Fed funds rate. We started the asset purchases for great reasons, right, the markets weren’t functioning, and we needed the accommodation. As I said earlier, the issue is a supply issue, not a demand issue. There is ample demand. It’s a supply issue, but I don’t see that this accommodation to the tapering is really providing a whole lot in terms of support for solving the unemployment problem. To getting that, where we are, I think we, as I said, we start this tapering process, then we think about raising the rates. But that’s down the road, we’re not going to do that right now.

BRIAN CHEUNG: How does financial stability factor into all that because I guess that’s a concern part of the framework as well when you take a look at asset prices I know some people have been paying attention to home prices, specifically, is there anything that’s catching your eye that is informing your concerns as you just outlined about the potential if you want to call it, unintended consequences of this asset purchase.

PATRICK HARKER: Oh yeah, absolutely. That’s right, we need to start that tapering process, sooner rather than later. Yeah, I mean, take housing for example, it’s clear that there are a lot of reasons why the demand for housing, just driving prices up too high. One of those is one more country, it’s not the only one. It’s also people’s demand for more space because of the pandemic, a host of other reasons that are driving this. But clearly, low rates is one of those and so as we start to chip away at the asset purchases through the tapering process. I think we can start to alleviate some of those potential financial stability issues. I think things are fine now, we just want to mitigate or minimize any future risk.

BRIAN CHEUNG: I mean I guess at the same time, some people have pointed out that there are differences though between this housing market and the one that was leading up to 2007, 2008 because when you do see commentary like that people go, “Wait, does that mean we’re about to go into another housing bubble?” But it’s a healthier different type of homebuyer in 2021 than in, say, 2006. So what is the underlying in that concern there, because those dynamics do appear to be a bit different?

PATRICK HARKER: Oh yeah, no it’s way different than in the Great Recession, so I think we need to be clear on that. But, at the same time, there are people, you talked about low-income communities, that are being priced out of the market, whether it’s through housing costs, in terms of purchase, or rent. Yeah, I mean that’s a concern. We want to make sure that people have a place to live with their families.

BRIAN CHEUNG: And then lastly the theme of this Jackson Hole conference is an uneven economy. Uneven might look different depending on what you’re looking at, what district you’re in. What do you think is the biggest unevenness that you observe in the third district of the Philadelphia Fed?

PATRICK HARKER: So you know we start with the fact that Philadelphia, unfortunately, is the poorest top 10 city in America with the deepest poverty of a top 10 city in America. So we have built expertise over 20 years, learning about how to solve that problem. We launched, a few years ago, something called the Economic Growth Mobility Project where we’re really trying to get at the core of why people can’t build the wealth, or get the jobs that they need to sustain their family. And so that to me is the biggest issue right now. It’s the disparity of wealth, which housing is a part of that, a big part of that, especially for low income communities and people being able to move up the ladder to what we call opportunity occupations, so they can get family sustaining wages.

BRIAN CHEUNG: Alright, worth watching there, but again we’ll let you get back to the conference now. Philadelphia Fed President Patrick Harker. Two New Jersey guys talking it up here on Yahoo Finance, thanks again. Thanks again for stopping by. We’ll have you again sometime soon.



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