Philly Fed's Harker: Raise interest rates; Growth to be modest, maybe hidden

Patrick Harker, President of the Federal Reserve Bank of Philadelphia, today renewed his support for a steady escalation of interest rates, pacing the U.S. economy, to preserve the Fed's "credibility." He says he expects only "modest" economic growth, adding it's possible the smartphone economy is hiding increases in productivity.

A former U of Delaware president and Wharton School dean, Harker was tapped by his fellow board members to run the Federal Reserve Bank of Philadelphia after Charlies Plosser quit. Harker took the job in July; remarks from two speeches he delivered to Fed audiences this week are attached below.

In contrast with Plosser, who said the Fed's real powers are effectively limited to influencing interest rates and price levels, Harker this week focused on the Fed mandate to stimulate employment. Today he addressed economists at a Fed symposium on "The New Normal" in the U.S. economy. He said he expects only "modest" economic growth, and renewed his call for higher interest rates. Highlights (emphases added):

The New Normal for the U.S. Economy: What is the "new normal?"... Today, we will hear several views...  broadly divided into three areas that have an impact on our economy: technology/innovation, social factors, and monetary policy...

(The smartphone economy may be minimizing reported growth:) Philadelphia Fed economist Leonard Nakamura has been researching how the evolution of information and communication technology is creating measurement issues for our statistics... Some innovations, such as free apps and social media, are widely used but may not generate revenue... Leonard calls this URL -- "Ubiquity now, Revenue Later."

In a "URL world," is productivity growth truly as low as it appears in the official statistics? It is possible that new disruptors to the economy, like free apps and social media are making our progress harder to capture in current economic measures. This is a special concern for monetary policy because it is possible that we are not fully capturing rising quality in our price measures and that inflation is even lower than we think it is.

These issues have a direct bearing on the conduct of monetary policy. This is why today's discussions on the economic impact of technology and innovation are relevant for central bankers...

Most of you are familiar with Paul Krugman's statement that while "Productivity isn't everything, but in the long run it is almost everything." The recent slowdown in productivity growth and the continuing downshift in labor force growth are prominently influencing our views of the new normal. But trends are not destiny — or at least they needn't be...

Our nation's growth is one of the most important issues we face as policymakers. We know that incremental changes in the standard of living will determine our future prosperity. We need to be thinking about what we can do to positively influence growth rates five, 10, and 15 years down the road.

While prospects for long-term growth in the United States remain solid, the medium-term outlook has been revised downward in recent years. My view, which is my own and not necessarily that of the Federal Reserve System or my colleagues on the Federal Open Market Committee (FOMC), is that we will see steady and modest growth going forward.

GDP growth has averaged 2.2 percent since the Great Recession ended in June 2009, and the most recent FOMC projections show the central tendency for long-term growth to be in the 1.8 to 2.2 percent range. Economic fundamentals have been improving, and we are approaching normalcy.

Accordingly, I would like to see rates raised sooner rather than later. With an early start, we can better ensure that monetary accommodation is removed gradually and that inflation returns to the Fed's 2 percent target smoothly. My fear is that the Federal Reserve risks losing its credibility and only adds uncertainty to the economic landscape the longer the Committee waits to begin normalizing policy.

Therefore, raising rates this year will, in my view, serve to reduce monetary policy uncertainty and to keep the economy on track for sustained growth with price stability...

One of the highlights of my first four months at the Fed has been the opportunity to meet with people across the District... Our challenge is to ensure that we have the resources, the vision, and the leadership to make full use of our District's potential...

(Below are highlights of Harker's Dec. 2 remarks at a Fed youth labor seminar)

Extending Opportunities: The idea of promoting maximum employment has always been part of the Federal Reserve's mission. This concept was formalized in 1977 when Congress amended the Federal Reserve Act, establishing what is now commonly referred to as the Fed's dual mandate: to achieve price stability and to promote maximum, sustainable employment...

The Research functions across the Federal Reserve System are an important source of data and analysis on labor market issues... Here at the Philadelphia Fed, our staff has been particularly focused on workforce-related challenges, issues, and opportunities for young people between the ages of 16 and 24.

The decrease in labor force participation among young people in recent years has been striking, declining from about 66 percent in 2000 to 55 percent in 2015... Significant barriers still exist for young people in the job market.

This is especially true for those young people who are currently disconnected... neither employed nor in school... They represent an untapped resource in our nation's economy.

Measure of America, a project of the nonprofit Social Science Research Council, reported that close to 14 percent of Americans between the ages of 16 and 24 are disconnected and that these rates are higher for minority youths...

These numbers point to an urgent need for communities to make efforts to engage these young people, in particular. We're fortunate in Philadelphia to have several organizations doing tremendous work. I have had the privilege of recently touring the facilities of the YouthBuild Philadelphia Charter School, Philadelphia Works, and District 1199C Training & Upgrading Fund...

For each of us, one person entrusted us with our first job. This person made an investment in us that is still yielding outcomes today. For me, I benefited greatly from having work opportunities at an early age. At 14, I started working on a farm near my hometown in New Jersey. And I can tell you that I learned things from my first job and from my first boss, John McGroarty, that I still reflect on... 

Starting to work at an early age taught me many skills that could be easily transferred to any job, and these skills made it easier for me when I started my career in earnest years later... I learned that if you work hard and show a desire to expand your knowledge, new opportunities can and do arise. And, perhaps most importantly, John taught me the value of having a mentor. I worked for John and his family for more than eight years... I have been very fortunate to have had several mentors, such as my father-in-law...

The problem we face is that too few young people are securing the types of job opportunities many of us had. Too many young people are not engaged in work or education... This can set them back for the rest of their lives. Research shows that when young people are not active in work or school, they fail to develop adequate professional skills, and they ultimately have lower earnings...

Education contributes to an individual's future earnings, but work experience matters as well...  We recognize the need for new perspectives, new partners, and new pathways... 

Apprenticeships offer one way to broaden access to training and employment. Apprenticeships have been the staple of workforces throughout modern history. George Washington was an apprentice surveyor, and Ben Franklin was an apprentice printer.

Apprentices receive structured on-the-job training, wages, industry-recognized credentials, and direct access to jobs and careers. Employers, in turn, obtain highly trained employees and increased productivity; they may also have a better experience in retaining employees...

Apprenticeships reach approximately 55 to 70 percent of youths in Austria, Germany, and Switzerland (but few in the U.S.) ... While in most other countries apprenticeships begin after secondary schooling, in the United States, the average age of an (apprenticeship) participant is now 28 years old. We must consider ways to make it easier for young people to access these programs...

Michael Wiggins is with us today from Southwire, a wire and cable producer in Georgia that has collaborated with local school districts to develop a program that addresses high drop-out rates and creates a job pipeline for local talent...

Simran Sidhu from the YouthBuild Philadelphia Charter School... has a wonderful partnership with Starbucks that involves training students to become baristas and then transitioning them into jobs... The program has a far greater impact than simply training future baristas. It is about giving our youth the necessary skills and the vision to see beyond that first job...

One of my primary focuses will be to explore ways to strengthen the Third District in the area of workforce development. As we deepen our engagement in workforce development issues, we want to hear from you about how we can be most helpful in this space.