Philadelphia Fed’s Harker: Don’t expect an interest rate hike ‘anytime in 2022’

Philadelphia Fed President Patrick Harker joins Yahoo Finance's Brian Cheung to discuss the U.S. economic outlook amid the COVID-19 pandemic.

Video Transcript

ADAM SHAPIRO: Let's bring into the stream two respected guests. First, we have Yahoo correspondent Brian Cheung, who covers the Fed for us. And he has a special guest, Patrick Harker, who is the Federal Reserve Bank president out of the Federal Reserve Bank of Philadelphia. Brian, take it away.

BRIAN CHEUNG: Yeah, well, thank you so much for joining us this afternoon, President Harker. I just-- I want to start off--

PATRICK HARKER: You bet.

BRIAN CHEUNG: --the conversation with, broadly speaking, how is the vaccine rollout going in your district? And what do you have as an updated economic outlook as we continue to try to get to the light on the other side of this tunnel?

PATRICK HARKER: Yeah, so thanks, Brian. Thanks for having me today. So we cover three states-- most-- Pennsylvania from most of-- west of Johnstown-- east of Johnstown, I should say, Delaware, and Princeton, New Jersey South. So we're a small district but a pretty diverse district. So the vaccine rollout is different in each of those three states-- different processes, different pace. It's happening in New Jersey. I can say we are starting to see the vaccine roll out. That's really good news. There is-- still is vaccine hesitancy. And we need to confront that, and we need to make sure that people are getting the vaccine when it becomes available.

What that means for us, in terms of our forecast right now, we're looking at a forecast of about 3% to 4% growth this year, probably a little more than 3% in the first half of this year. Second half of the year, we'll look at 5% to 6%-- say, call it 5-ish-- coming in with a little more than 4% growth for the end of the year. With unemployment hovering a little north of 5% is our forecast and inflation still running below our 2% target, we're looking at the end of this year around 1.7%.

What that means for us-- we put into that forecast a $900 billion stimulus package. We'll see what comes out of Congress, and that may change our forecast going forward. But right now, we think that we are climbing out of this situation. It's going to be bumpy, and there are still people who have significant issues that need to be dealt with as we come out of this pandemic crisis.

BRIAN CHEUNG: So President Harker, I want to drill on that point. You said that your assumption in your economic forecast is for $900 billion. That's not the $1.9 trillion that's being proposed right now.

PATRICK HARKER: Right.

BRIAN CHEUNG: I guess, why did you pick that number? And if it is the case that it ends up being something close to $1.9, is there a risk of the economy overheating?

PATRICK HARKER: So let's define overheating. I think that word gets thrown around a lot, but I think we need to define it. For us at the Fed, we've been under-running our 2% inflation target now for a long time. So as long as inflation rises to 2% and, with our new monetary policy framework, above 2% for a period of time, we're good with that.

But we don't want to see is inflation running out of control. At this point, I don't see signs of that. We just don't see signs of inflation running past 2% in a very rapid fashion.

And so it's not just the level above 2% that matters. It's how quickly the inflation rate is moving. Right now, we're just not seeing it, right? It's still bumping around. We're still looking at our forecast below 2%. And so while it's always a concern and we have the tools to deal with that if inflation starts to accelerate beyond what we deem acceptable, I don't see that as an outside risk right now.

BRIAN CHEUNG: Now, it seems like those inflationary pressures are something, though, that the markets are watching very closely, and I want to bring up the--

PATRICK HARKER: Sure.

BRIAN CHEUNG: --10-year yield. It's looking like at about 147 basis points right now. Some of that might be on the expectation that the Fed might hike earlier if inflation starts to rise maybe faster than expected. So the implied pricing might suggest a 25-basis-point hike even in 2022. Are those expectations right or wrong from where you stand?

PATRICK HARKER: So for me, that is not my forecast. I can only speak for myself and not for my other colleagues at the Fed or the FOMC. But for me, I'm not looking at a hike any time in 2022. Probably if there is one, it's toward the latter end of the year for 2023. I mean, I think we got a ways to go. There's a lot of uncertainty.

The thing that I really want to emphasize here is there is so much uncertainty still in the economy. And I think we just have to take all of these forecasts with many, many grains of salt and really just hold onto where we are. Let's climb out of this pandemic and then see where we go.

Now, we are starting to see some inflation expectations rise. I mean, the TIPS-- the 10-year breakeven-- is rising. And that's-- again, from my perspective, that's a good thing because we want to see inflation expectations anchored at 2%. And if inflation rises slightly above 2%, that is more than acceptable. That's actually what we want for a period of time.

BRIAN CHEUNG: So could the Fed, though, still need to maybe, at some point, address the longer-term borrowing costs if they rise too high, something like a yield-curve control? I know that the views you express today are your own and they don't represent the FOMC.

PATRICK HARKER: Yeah.

BRIAN CHEUNG: But from where you stand, do you see maybe an argument for deploying some sort of tool like that if it continues to rise?

PATRICK HARKER: So I think there's a host of tools that we have, right? And again, we think a lot about the Fed funds rate-- the interest rate-- but we also have our asset purchase program and a host of other things. Things like yield-curve control are possible. But at this point, all those are under discussion, and I wouldn't take anything off the table. But at this point, I am firmly committed to holding where we are. Let's climb out of this crisis.

And this is for a very simple reason, right? When you're in the middle of the crisis, the fewer things you can change the better. Let's focus on the things that really matter, and then we'll start to deal with these other things as we climb out of this pandemic.

BRIAN CHEUNG: And on quantitative easing, the Fed has made it clear that it won't begin tapering out until you see that substantial further progress towards your dual mandate.

PATRICK HARKER: Correct.

BRIAN CHEUNG: But it's also coming alongside what seems to be improving economic outlooks, like you just laid out at the beginning of this interview. So how do you balance those two things, and when do you think that we might be able to get to a point where we do hit substantial further progress, whatever that means?

PATRICK HARKER: Yeah, so I'm reluctant to put a date on it because it really does mean that-- what is driving this is our dual mandate goals. And given the uncertainty and all the forecasts-- and I think if you talk to forecasters, we've got our own-- I talk to forecasters. There's a survey of professional forecasters that we run out of Philadelphia. There's a lot still a lot of uncertainty in these forecasts.

So I'm reluctant to put any date on when we'd start to reduce asset purchases. That said, I think the playbook will be very similar-- not identical, but very similar-- to what we did after the Great Recession, right? We'll start that process, and then we'll start to slowly, methodically raise rates, unless, of course, some unexpected event happens. In which case, we respond appropriately.

BRIAN CHEUNG: So the Philly Fed recently launched this tool called the Occupational Mobility Explorer to address the skills gap. It's pretty nifty. If you're, like, a baker that's out of work, the tool might suggest a new job, like maybe a butcher, and the skills that are needed to make that jump. And it's even tailored to metro area.

What role do you see this tool playing, President Harker, within the context of the COVID recovery? There's been a lot of structural changes in this labor market. What does this do?

PATRICK HARKER: Yeah, exactly. So I'm really excited about this tool and the work that we're doing in Philadelphia and also, in this case, our colleagues in Cleveland. So here's the situation. We had a great economy. It's hard to remember before the pandemic, but we had a great economy. The labor markets were tight, and companies started to get more creative about bringing people off the sidelines and into the workforce-- excellent for the companies and for those individuals and their families.

Of course, the pandemic has reversed a lot of this, particularly for lower-income families, particularly for Black and Latinx families. And so what we're concerned about-- everybody talks about the K-shaped recovery, but that's in our hands to some extent, right? Collectively. We can do something about this. And so that's what this tool is aiming to do.

So the researchers first looked at 33 metro areas across the United States, and asked the following question, what are those low-income jobs that have a partner in a higher-income job-- they're paying at least 10% more-- where you don't need a four-year college degree-- what we call opportunity occupations? And they looked at these, and about half the jobs they looked at, there was that match with an average increase in salary-- annual salary-- of $15,000. So this is real money.

This tool went one step further. It took those 33 metro areas, and it looked specifically at, OK, what are the career pathways that people might have? And so this tool gives you both the pathway and are those jobs growing or not in your region.

So let me give you two examples of the kind of jobs that are out there. Let's say you're a bill collector in Philadelphia. Well, you have skills. And that's the other thing-- just because you're low income doesn't mean you don't have skills. Everybody has a certain set of skills. And so how do you use those skills and get rid of some of the other impediments to those opportunities? And we can talk about that, too.

But just on the skill side, how do you use those skills to maybe upskill a little bit to get a new job? So you're a bill collector. You can become a credit counselor with an average increase in salary of 45% in Philadelphia. Or let's say you're a maintenance mechanic in Cleveland. You could be a truck mechanic-- a diesel mechanic-- or an HVAC mechanic with an average increase in salary of 22%. So these are real opportunities.

The other nice thing about the tool is it's not just that one leap that you can look at that is go from where I am now to the next move, but you can actually look at subsequent moves and see how you can build out your career. This tool can be useful for people who are looking to make those changes, for community colleges looking to develop curricula, for community organizations, for employers. This is a very powerful tool I'm very excited about.

BRIAN CHEUNG: Now, you bring up the disparity that exists. And drawing the statistic in specifically Pennsylvania, the Black unemployment rate 17.2%, whereas the white--

PATRICK HARKER: Yeah.

BRIAN CHEUNG: --unemployment rate, 7.8%. That's a massive, almost 10-percentage-point gap.

PATRICK HARKER: Yep.

BRIAN CHEUNG: How does that disparity factor into how you're assessing where the labor market-- and in addition to that, this tool might be one way to address that, but it can't be the only tool, right?

PATRICK HARKER: No. And so in addition to the skills development, right? Taking-- I mean, a lot of this is due to the fact that Black and Latinx families typically have low-income jobs in certain communities-- not everywhere, of course, but in certain communities. This tool helps those communities and the people supporting those communities to develop a plan. And so this is one, but there are many-- one issue, the skills gap. But it's not just a skills gap.

We know that other things play an important role here. We see this with women, in particular, who have dropped out of the labor force during this pandemic. There's childcare issues. There's eldercare issues. There's transportation issues. There's housing issues. The list goes on and on. There's lots of impediments.

And so what we advocate-- what I advocate-- is instead of playing what I'll call whack-a-mole-- let's go fix the skills gap or let's fix the child care issue-- you really need to move all of these in tandem to help people get into the labor force. We were doing that-- again, before the pandemic hit-- because companies, organizations saw it in their self-interest to do that, given what was happening with the tightness of the labor market. This is accelerated in some-- the bad side is accelerated, to some extent, because of things like automation and so forth. That's inevitable. So we need to be proactive in helping people get the skills they need and reduce the barriers that we talked about-- the other barriers we talked about to full employment.

BRIAN CHEUNG: And you bring up some of those structural, secular changes that existed before the pandemic, like changes in productivity that maybe leads to some structural unemployment. But obviously, the closure of businesses in the midst of this pandemic might lead to structural damage that may even prevent people who want to use this tool from being able to make that pivot. So the Fed has a blunt instrument when it comes to interest rate policy. So--

PATRICK HARKER: Right.

BRIAN CHEUNG: --how does the Fed think about actionable other things to do when it comes to trying to close that gap?

PATRICK HARKER: That's our community development function. The thing that people often don't know about the Fed-- in addition to the monetary policy, of course, is the headline event at the Fed-- we do tremendous work, really coming out of our Community Reinvestment Act function and supervision, in helping communities understand where they are, where they can go, in providing that research and, in this case, specific tools. And there's other work that we're doing in other areas as well.

And for example, at the Philly Fed, we've launched something called the Economic Growth and Mobility Project, or EGMP, that's really addressing these three areas, right? Getting the jobs that pay above median wage is good-- jobs, opportunity, occupation, jobs-- getting people the skills they need to build those jobs, and then having the infrastructure-- housing, transportation, childcare, you name it-- that's there so they can get to the job or the job can come to them if they don't have broadband access. So this is an active area of research in Philly Fed and, really, across the Federal Reserve System.

BRIAN CHEUNG: So final question to wrap up on, we were at 3.5% unemployment rate on the headline rate headed into this pandemic. How far are we right now from maximum employment?

PATRICK HARKER: Oh, we're a ways off. It's hard to actually pick a number on maximum employment and what the natural rate is. I mean, That. Varies a lot, and you really don't know it until you see it. That is, inflation starts to take off and wage inflation, in particular, starts to take off. So we don't know exactly what that number is.

But my view is-- I'm a pragmatist, by nature-- we were down at those low levels before the pandemic. That kind of should be our goal. We know the economy can get there. That is, we were there with low inflation, and we are starting to see tremendous creativity across the economy in bringing people into the labor force, bringing people into work, bringing people into family-sustaining jobs. We can get back there. We just have to do it as a collective. We have to do it together.

BRIAN CHEUNG: All right, well, hopefully we can get back to that point relatively soon. Again, the Occupational Mobility Explorer, you can find out on the Philly Fed website. But again, Philadelphia Fed president, Patrick Harker, thank you so much for joining us on Yahoo Finance today.

PATRICK HARKER: Thanks, Brian.