(Reuters) -Philadelphia Federal Reserve President Patrick Harker said on Tuesday he favors a “methodical” series of quarter-percentage-point interest rate increases, but is open to larger half-percentage-point hikes if inflation does not soon show signs of easing.
“I have penciled in seven … 25-basis-point increases for this year,” including the one just approved at the U.S. central bank’s March 15-16 policy meeting, Harker said in comments to the Center for Financial Stability in New York.
If there is no improvement in inflation data, “I am open to sending a strong signal with a 50-basis-point increase at the next meeting,” Harker said, adding that new coronavirus restrictions in China could throw a “wrench” into global supply chains and add inflation pressure beyond what’s coming from the war in Ukraine and other factors.
Harker’s comments put him among the five policymakers who see the Fed’s benchmark overnight interest rate rising to a range between 1.75% and 2% this year, which is also the median projection of all Fed policymakers as of the March meeting.
What Harker sees as a “deliberate, methodical” move higher in that policy rate began on March 16 when the Fed lifted it by 25 basis points, moving away from the near-zero rate put in place to limit the economic damage from the pandemic.
Since then, officials have struck an even more hawkish tone, with comments by Fed Chair Jerome Powell and others pointing to a half-percentage-point increase at the Fed’s May 3-4 meeting.
Harker said he felt the Fed should be cautious about moving too fast, and did not want to “slam the brakes” on the current economic expansion.
But he also said that the Fed needed to lift rates “as quickly as possible” to a neutral level, which he estimated at around 2.5%, and tighten financial conditions even further by beginning to reduce the central bank’s nearly $9 trillion balance sheet “sooner than later.”
A plan to reduce the Fed’s holdings of Treasury bonds and mortgage-backed securities could be announced as soon as the May 3-4 policy meeting, and Harker said steady monthly decreases could add the equivalent of two additional quarter-percentage-point rate increases.
Harker also set aside signals coming from some corners of the bond market that aggressive Fed hiking may lead to a recession.
The spread between 10-year and 2-year Treasury bonds on Tuesday was nearing zero. When it dips below zero, it indicates some loss of faith among investors in future economic growth.
Many Fed officials, and recent Fed research, have disputed the value of a bond market “inversion” as a recession warning, particularly in an era when all interest rates are low.
Harker said he viewed the current structure of bond spreads as only one market signal, and not necessarily the defining one.
“As a policymaker I have to look at the combination of all those numbers and come up with a pragmatic path of policy and not base it upon any one number,” he said.
(Reporting by Howard SchneiderEditing by Paul Simao)
