Fed's Harker: Rate Cuts Likely, But Uncertainty Looms Large

Philadelphia Federal Reserve President Patrick Harker has indicated that the US central bank is still expected to continue cutting interest rates, but the path will depend on incoming data. Speaking on Thursday, Harker emphasized the importance of a data-dependent approach to monetary policy, given the high uncertainty surrounding the economy. This approach is reflected in his comments about the strength of the economy's underpinnings, the need for the Fed to remain data-dependent, and the recognition that it is taking longer to get back to 2% inflation than initially expected.



Harker's data-dependent approach is evident in his assessment of the labor market, which he described as being in better balance, and his recognition that the job creation pace has normalized. However, he also expressed concern about rising signs of stress among lower-wage earners. This balance between acknowledging the economy's strength and addressing potential vulnerabilities is likely to influence Harker's rate cut expectations.

Given the uncertainty about the neutral rate and the vague sense that the federal-funds rate is getting closer to it, the Fed is virtually certain to slow the pace of rate cuts in 2025 to better gauge the effects of monetary policy. The upward revision in the Fed's projected year-end 2025 rate appears attributable to its upward revision in projected inflation, which now expects core PCE inflation at 2.5% year over year in the fourth quarter of 2025, versus 2.2% previously.



The Fed's decision to slow the pace of rate cuts is likely to be influenced by several factors, including the need to balance supporting the economy while addressing potential vulnerabilities, such as persistent inflation and stress among lower-wage earners. By remaining focused on the data, Harker can better gauge the appropriate pace of rate cuts to support the economy while maintaining price stability.

In conclusion, Harker's views on labor markets and inflation suggest that he is likely to be cautious and data-dependent in his rate cut expectations. He may prefer a gradual approach to rate cuts, balancing the need to support the economy with the need to address potential vulnerabilities. The Fed's decision to slow the pace of rate cuts reflects the uncertainty surrounding the economy and the need to better assess the impact of monetary policy on inflation and the labor market.