Harker: Fed should slow rate hikes til late 2016 (Updated)

Patrick Harker, President of the Federal Reserve Bank of Philadelphia, returned to the University of Delaware, which the former Wharton Dean ran as President until last year, and told a crowd of bankers, UD bosses and business leaders at the yearly UD Economic Forecast that Philadelphia employers face hiring shortages for skilled workers, U.S. economic growth will slow a bit (given the strong dollar, falling U.S. stocks, and weak China demand) but not stop this year, and that the Fed should consider fewer, bigger and later rate hikes, starting this fall, instead of ramping up rates sooner. 

Harker, who hasn't yet served his first voting rotation (corrected) on the Fed's national policy-making body, said he lined up with Fed chair Janet Yellen in relying on economic data to decide "the appropriate timing" of interest-rate hikes. In contrast with his predecessor Charles I. Plosser, who was openly skeptical of the Fed's power to directly reduce unemployment on a lasting basis, Harker said he embraced both unemployment and inflation targets as legitimate Fed goals. 

He predicted U.S. consumption will grow 2.7% this year, led by housing, with business spending trailing. He predicted "continued strength in job growth," with "more than 2 million net new jobs" -- though down from last year -- with many of the new posts "in high-skilled professions." In eastern Pa., South Jersey and Delaware, Harker says he's heard a lot of employers "lament about the difficulty in finding the right workers," anecdotal claims he said are supported by recent Labor Department job reports. He expects wages will grow faster than last year, when pay was up a cumulative 2 percent (or less when you count inflation.)

Harker also expects more Americans will start looking for jobs again, though not enough to keep the unemployment rate from dropping to around 4.7% by the end of the year.

He blamed the 10% drop in stock prices this winter to "worry regarding China" and its slow growth. But China isn't our only trading partner, he added. Investment losses will slow the economy but not stop it in the long run, which is where Harker says policymakers should focus.

Harker cited strong growth in apartment rentals and home purchases. But he warned "it is unlikely that we will see strong growth in business fixed investments," since the strong dollar has cut U.S. Exports and demand from manufacturers. Investment will trail consumer spending, growing just "2.5% or so."

Inflation will stay weak for now, but once we discount low energy prices -- which are sure, he said, to rise again -- and the impact of the strong dollar prices will rise close to the Fed's 2% yearly target. Tbe Fed might consider cutting that target since it has seldom met it -- just twice since 2008, Harker said.

"Firms are planning to raise wages, especially for jobs that are proving to be hard to fill," he emphasized. Accelerating wage growth could boost prices, after "negative" inflation in the first half of the year. He now thinks prices will rise more slowly this year than he previously projected. 

So "it might prove prudent to wait until the inflation data are stronger before we undertake a second rate hike," Harker added. By the fall, with the economy growing a bit faster, unemployment lower, inflation rising, "policy can truly normalize" and rates ise -- with "fewer rate hikes" than the Fed used to apply.

"Delaware is fighting to maintain its edge in attracting and retaining corporate headquarters," Harker said, pointing to "the recent loss of DuPont" as a "stark reminder." The state hopes to rely on "education and health services," though Philadelphia Fed researchers have noted in the past that schools and hospitals grow only as fast as a region's population. Harker puffed his own record a bit, noting UD on his watch had taken over the former Chrysler plant and turned it into "Star Campus," a mix of classrooms with an industrial park now home to Bloom Energy, a "fuel cell" factory that has absorbed more than $100 million in Delaware electricity users' subsidies, and SevOne, aong with electric vehicle and cybersecurity programs.