Fed’s Harker sees ‘lack of progress’ on inflation, expects big rate hikes ahead

Philadelphia Federal Reserve President Patrick Harker said Thursday that higher interest rates have done little to keep inflation in check, so more increases will be needed.

“We will continue to raise interest rates for a while,” the central bank official said in remarks in New Jersey. “Given our frankly disappointing lack of progress in curbing inflation, I would expect us to be well above 4% by the end of the year.”

The latest comment was in reference to the fed funds rate, which is currently targeted in the 3%-3.75% range.

Markets widely expect the Fed to agree to a fourth consecutive rate hike by 0.75 percentage point in early November, followed by another hike in December. The forecast is that the Federal Open Market Committee, of which Harker is a non-voting member this year, will take rates slightly higher in 2023 before settling in the range of around 4.5%-4.75%.

Harker noted that these higher rates are likely to remain in place for a long time.

“Sometime next year, we will stop raising interest rates. At that point, I think we should hold out at a captive rate for a while to allow monetary policy to do its work,” he said. “It will take some time for the higher cost of capital to work its way through the economy. Then, if we have to, we can tighten further, based on the data.”

Inflation is currently hovering around its highest level in more than 40 years.

According to the Fed’s preferred metric, PCE inflation is 6.2% annually, while the core rate, excluding food and energy prices, is 4.9%, both well above the central bank’s 2% target.

“Inflation will come down but it will take some time to reach our target,” Harker said.