Philadelphia FED President Patrick Harker said today that the US Federal Reserve may cut its benchmark interest rate once this year if its economic forecasts come true as expected.
At an event hosted by the regional central bank in Philadelphia, Harker outlined his baseline scenario of slowing but above-trend economic growth, a modest increase in the unemployment rate and a “long float” for inflation toward the target. “If all this happens as predicted, I think a rate cut by the end of the year would be appropriate,” Harker said.
The FED kept interest rates unchanged at 5.25-5.50% at last week’s policy meeting. This decision is part of the Fed’s ongoing efforts to bring inflation back to its 2% target rate. As of April, inflation was running at an annual rate of 2.7%, according to the Fed’s preferred measure.
While Harker welcomed last week’s Consumer Price Index data, he noted that progress in inflation so far this year has been modest. Harker emphasized that given the general volatility in the economic environment, more data will need to be analyzed in the coming months before making a decision.
Harker also argued that the FED should keep its policy rate unchanged for now to reduce upside risks. These include the potential long-term persistence of high housing inflation and the persistently high inflation rate in the service sector, especially auto insurance and repairs.
But Harker did not rule out changing his view on interest rates as more economic data becomes available. “If the data changes one way or another, I see it as quite possible there will be two reductions or no reductions for this year, we will stick with the data,” Harker said.
At its last policy meeting, the median forecast of the Fed’s 19 policymakers was for a single rate cut this year. Financial markets currently expect two interest rate cuts by the end of the year.
*This is not investment advice.
