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The Fed: Fed’s rate hikes, balance sheet unwind won’t be ‘so aggressive’ as to risk recession, Harker says

The Federal Reserve wants to raise interest rates and unwind its balance sheet in a way that is not so aggressive that it pushes the U.S. economy into a recession, Philadelphia Fed President Patrick Harker said on Wednesday.

The Fed is committed to both methodical rate hikes and shrinking its balance sheet, Harker said, in a virtual discussion hosted by the Delaware Chamber of Commerce. These two separate tools will slow down economic growth, he said.

At the same time, The Fed wants to “thread the needle” and maintain a healthy economy, he said.

The Fed wants to act “in a way that isn’t so aggressive that we risk putting the economy in recession,” Harker said.

“People still need jobs. People still need a good economy,” he added.

“The good news” is that the economy is “very healthy” as the Fed starts the process of moving away from its easy money policy stance, Harker said.

The Philadelphia Fed President will vote at the central bank’ next policy meeting in early May.

Last month, the Fed raised its benchmark Fed funds rate by 25 basis points to a range of 0.25% – 0.5%. Economists estimate that rates won’t start to restrict economic growth until the Fed moves its benchmark rate above 2%.

In separate remarks, Richmond Fed President Thomas Barkin said the central bank has “some time” to raise interest rates to what it considers “neutral.” He repeated his view that the Fed has to weigh the risk of moving too fast and causing an economic slowdown against its desire to help reduce inflation quickly. 

Markets have grown concerned this week that the Fed might be more hawkish than anticipated.

On Tuesday, yields on the 10-year Treasury note
TMUBMUSD10Y,
2.605%

jumped after Fed Governor Lael Brainard, a long-time dove on the central bank, backed reducing the Fed’s balance sheet at a “rapid” clip. Stocks
DJIA,
-0.77%

SPX,
-1.22%

have also slumped in the wake of Brainard’s remarks.

In other comments, Harker said Americans shouldn’t expect immediate relief from higher energy prices.

“I don’t see [fuel prices] going away quickly. This incredible tragedy we’re seeing unfolding in Ukraine is not going to go away,” Harker said.

U.S. producers will ramp up oil production but this takes time, Harker said.

“You can’t just flip the switch and all of a sudden you’re producing more energy,” he said.

Energy prices will continue to have an impact on inflation numbers, he added.

Harker said he was “acutely concerned” with the high inflation rate.

“Inflation is running far too high,” he said.

There are some signs that the supply chain disruptions in the wake of the pandemic that have boosted goods prices are easing, but “we’re not out of the woods,” he said.

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