ADVERTISEMENT

Fed’s Evans, Harker See Three or Four Rate Increases in 2022

Fed’s Harker Sees Liftoff in March, Three or Four Hikes in 2022

Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Federal Reserve Bank of Philadelphia President Patrick Harker and Chicago bank leader Charles Evans joined the widespread calls by their policy-making colleagues for higher interest rates this year. 

While Harker favors a March liftoff and three or four hikes for 2022, Evans -- who sees a similar number of increases this year -- said he couldn’t judge the likelihood of the first raise taking place in two months’ time. Richmond Fed President Thomas Barkin, who isn’t voting this year, said officials will be in a position to start normalizing rates at their March meeting should circumstances support that.

“My forecast is that we would have a 25 basis-point increase in March, barring any changes in the data,” and two more this year, Harker said Thursday to a virtual event hosted by the Philadelphia Business Journal. “I could be convinced of a fourth if inflation is not getting under control. But again, we have to look at the data.”

Fed’s Evans, Harker See Three or Four Rate Increases in 2022

Harker joins a large group of Fed officials -- led by St. Louis Fed President James Bullard and including one-time doves such as San Francisco leader Mary Daly -- in urging a near-term rate hike following the tapering of asset purchases, which is scheduled to end in March.

Harker, acting as the alternate this year for the Boston Fed that’s currently without a president, is expected to vote in its place on the policy-setting Federal Open Market Committee until that seat has been filled. 

The Richmond Fed’s Barkin didn’t comment on the number of interest-rate increases he expects this year, but said that the closer inflation comes back to target levels, the easier it will be to normalize rates at a measured pace. 

Speaking at a virtual event hosted by the Virginia Bankers Association and Virginia Chamber of Commerce, Barkin said that if inflation remained elevated and broad-based, “we would need to take on normalization more aggressively, as we have successfully done in the past.”

Chicago’s Evans -- who in December had penciled in three rate increases for 2022 -- said a fourth hike could be on the cards if price pressures didn’t improve. 

Speaking to reporters on a call, Evans said the time between rate liftoff and when the Fed starts allowing maturing investments to roll off its $8.77 trillion balance sheet will be shorter than in previous instances. “I expect we will make that choice before too long,” he said.  

Asked whether the FOMC could decide at its January meeting to stop asset purchases earlier than March, Evans said “I have to hear the arguments. I am not sure what additional data I have seen since December” would cause favoring a change at the January meeting. “We will have to go to the meeting and talk about it,” he added.

Harker said he sees the Fed starting to shrink its balance sheet in “in late 2022 or early 2023” after the central bank has raised its target rate sufficiently, to around 1% from near zero. He said he favored moving to a balance sheet concentrated in shorter-duration Treasuries, with Treasury-heavy or Treasury-only composition over time.

Fed’s Evans, Harker See Three or Four Rate Increases in 2022

While the U.S. economy has lost jobs since the start of the Covid-19 pandemic, that represents a supply issue, he said. Demand for employees is very strong and the Fed has met its target of maximum employment, Harker said. Meanwhile, inflation has surged much higher, which raises the concern that inflation expectations could become unanchored, he said.

The U.S. economy is likely to grow 3-4% this year, with the first quarter hurt by the omicron variant, Harker said.

“So many people are becoming infected simultaneously that businesses can’t staff themselves,” he said. “Airlines are canceling flights, restaurants are shuttering their kitchens, and big-box retail locations are closing down temporarily.”

©2022 Bloomberg L.P.