Fed's Harker Says He Didn't Back Last Week's Interest-Rate Cut

(Bloomberg) -- Federal Reserve Bank of Philadelphia President Patrick Harker said he wasn’t in favor of the central bank’s decision to cut interest rates last week given a strong U.S. economy, even with slowing business investment and downside risks.

“I was not supportive of the cut we just made,” Harker said Friday during a speech in New York. “My own view is that we should hold firm, letting things settle and watching how events play out.”

The Philadelphia Fed chief pointed to “remarkable strength” in the job market and cast doubt on whether rate cuts would have much of an effect on the economy.

“The reason people aren’t investing, and business investment, has nothing to do with the cost of capital, in my view,” Harker said while answering questions after the speech. “I just think a 25, 50-basis point cut won’t have a big effect.”

The U.S. central bank’s policy-setting Federal Open Market Committee, on which Harker sits but does not have a vote on decisions this year, lowered rates by a quarter percentage point in July and again in September as the economy cooled and global storm clouds gathered.

Harker’s comments put him in a group of five officials who in September did not see a rate cut as appropriate. Five others supported the cut in September but thought no further easing would be needed this year, according to anonymous projections published at the conclusion of the Sept. 18 meeting. The remaining seven favored another cut before the year’s end, the projections showed.

Policy makers will next gather Oct. 29-30 in Washington.

Earlier Friday, in a television interview on Fox Business Network, Harker said he also believes the Fed is approaching the point where it will have to begin expanding its balance sheet again to prevent bank reserves from falling too low. The Fed has stopped trimming its portfolio, but reserves continue to decline as the demand for currency in circulation increases both inside and outside the U.S.

“We knew when we put this in place we were going to come down with respect to the level of reserves, go flat for a while and start growing organically as liabilities, particularly currency liability, grew,” he said. “We’re pretty close to that right now.”

In his later remarks, Harker stressed that allowing the balance sheet to grow to keep pace with the economy would not be the same as the crisis-era monetary policy stimulus it undertook via three rounds of massive bond purchases, also known as quantitative easing.

“This is not QE4. Let me make this clear. This is not a monetary policy tool,” he said.

Market Turmoil

Harker said in his television interview that the decline in bank reserves may have been a factor in turmoil that gripped overnight money markets this month, along with the distribution of reserves across banks and larger-than-expected auctions of U.S. Treasuries, which drained away cash the might have been available for overnight lending.

Rates on overnight repurchase agreements soared last week, briefly causing the Fed’s benchmark interest rate to jump out of its target range. The Fed responded by lending cash into that market in transactions that are collateralized by U.S. Treasuries.

“There are lots of likely suspects” for what caused the sudden cash crunch, he said. “We can take some time. We’ve put in place the tools we need to create liquidity in the markets, and we’ll, over the next couple of months, really try to understand what happened.”

Harker’s assessment of the U.S. outlook was also echoed Friday by Governor Randal Quarles, who said that “fundamentally the U.S. economy is quite solid,” though uncertainty around global growth and trade policy were weighing on investment spending.

“Business investment has kind of fallen off of a cliff,” Quarles told an audience at Georgetown University Law Center. “I think that’s a concern, but not one which affects the fundamental soundness of the current position of the economy.”

To contact the reporters on this story: Matthew Boesler in New York at mboesler1@bloomberg.net;William Edwards in Washington at wedwards29@bloomberg.net;Christopher Condon in Washington at ccondon4@bloomberg.net

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Scott Lanman

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