Philadelphia Fed President Patrick Harker Talks Outlook for Rate Cuts

From Jackson Hole for our radio and television audiences worldwide. This is a Bloomberg Special interview following up on the JPOW FED chairman's speech. Here in Jackson Hole, we have Philadelphia FED President Patrick Harker joining me, Lisa Bramwitz and Tom Keing, and we'd like to thank you very much, Pat for coming out, sure interrupting your seminar. Rumor has it you're going to cut rates, That's what I hear. You've been somewhat reluctant. Are you on board?

No, I'm I said the last couple of days it's time to start a process. And I think it's a process. It's not about a particular number. The process needs to be dictated by the data we see. But we need to start moving rates down, no question about it.

Well, if you start moving rates down. The one thing that didn't come through in the speech is by how much?

Yeah, and again I think we need to let the data dictate this. I think what matters more than a particular number. Now, I've been out and about my district all summer talking to contacts, and one thing I heard is twenty five point fifty. That doesn't matter so much as commit to a process. Be methodical about the process in particular, because what I've heard, particularly from the bankers, is they need time to absorb the changes. So don't just stop and start. Don't just do a large decrease

This, to me really underscores what Lord or Master was saying formerly of the Cleveland Fed Reserve, where it makes sense for the Federal Reserve to go by twenty five basis points to begin with and then potentially come more significantly later on, because then you're not signaling to markets, you're going to go much further.

Is that what you agree with?

Yeah, and we'll see how things. You know, there are a lot of risks go out there in the economy and the global economy. So we start with twenty five and we just let it run and keep moving that. And we're already seeing it, right, We're seeing the long end of the curves start to come down. That's been good. The mortgage business is back. You talk to bankers, they're starting to write mortgages again. That's all good news for the economy.

I've got to ask the engineer the question Susan Collins was channeling Patrick Chercker here the other day. She says, we need to lose a pessimism. We need to be more optimistic about where we are right now. You, more than anyone I know, listens to business. What are you hearing from business about investment next year? About their confidence forward?

Yeah, they're cautiously optimistic, I would say, right now, I think they are optimistic. But depends on the industry and depends on where they are in their own business cycle, right But yeah, generally we're saying take housing for example. Housing is a good example. We know that a lot of developers are sitting on their hands waiting for rates to come down for this process to start. I think that's a good thing because we need them to build

When the Chairman spoke today, he suggested that the balance of risks has changed. Inflation is coming down and it's probably not going to shoot up again because of the rising unemployment rate. But the rising unemployment rate in turn is a bigger risk at this point. How much of a risk do you see of downturn from unemployment?

So I don't see a large outside risk the employment. Unemployment can go up some right, and it probably will go off a little bit. It will definitely, in our view, not peak above say five percent. I mean it will be below that for sure. No, not for sure. We never nothing for sure. But you got to look at the totality of the data too. It's not just about that number, right, It's about what we're hearing from our contacts, the claims data, the job to job transition data. There's

Well, this is a confidence question for sessions, there are always a confidence question. You're talking about confidence CEOs that the business is going to be okay. But what do you hear from the average person who could pull back if they see the unemployment rate going up.

It really is a tale of two consumers, to simplify things. Those who have the money are spending the money. They're not that concern. Low moderate income households are really still feeling the pain. They're feeling your pain of housing prices, food prices, you name it. So they are very concerned. So it really depends it's not one size fits all. There's not the average consumer. That person doesn't exist in our economy.

So everyone's talking about this process, right, you talked about that too. This is the beginning of a process. One thing that I noticed was missing was the word gradual from Jpala speech.

We can get to that in a second. Do you have a sense of where we're heading?

Yeah, so I like the word methodical. That's what I'm hearing from my contacts. Please just make it so that we know where you're going in a very clear way. And then you start that process, and don't you stop and start.

As I said earlier, so where are you going.

Well, we're going to go back to whatever that new neutral rate.

Is, so we have an idea of what that could be.

Yeah, I mean, we don't know exactly what it is. We'll know when we get there. Let's be honest. You can't know it a priori. But you know that's probably around something around three percent issure, you know, somewhere around there, But we don't know that for sure.

One of the new things that social media is wonderful people. There's a guy named Triple Net Investor that's out there revealing empty office buildings trading for next to nothing. We got good news. Philadelphia is not on the latest list of this city that city and the other city from where you stand and from all your contexts, and Philadelphia is let on this. Where are we on the wash out and clean up of commercial real estate?

Again, let's commercial real estate isn't one size fits all thing. So downtown office is what we're talking about. The dentist in the suburban office mall is doing just fine. Right, it's that downtown office space. We are starting to see that clean out some It's again it's going to take some time, whether it's new businesses moving into that space at much lower rents or conversion. We're seeing a lot of conversion activity as well.

Do you have a confidence that the banking industry is resilient to that conversion that's so far?

Yes, I do, but it's something we clearly need to keep our eye on.

Sticky with real estate, let's talk about the residential side. You were optimistic at the start of the interview here talking about mortgages coming back. There's been a lot of criticism. Have fed maybe breaking the mortgage market because interest rates rose above what the majority of people had for their mortgage rate.

Do you have an.

Idea of what level housing it takes for housing to come back, and is that figuring into your calculations where neutral should be.

Yeah, So we had to do what we did to get inflation under control. So I don't know apologies that we took rates up quickly. I think about my generation, the baby boomer, it's the largest generation to go into retirement. We're sitting on these low mortgages. We want to move. We don't want that big house anymore. That lock in effect, it will start to ease as rates come down, and we're already starting to see a little bit of that again. I talked to the bankers. They're writing mortgages again, not

This is a critical statement from mister Harker. The idea like, when the rate comes down, where does the fevers step in? Again? Are you looking in Jackson?

It would take a lot, a lot, It would take a lot for that to happen. Another question that comes up now that you're essentially starting the path to rate cuts is what do you do about the balance sheet? Because in theory they work in opposition to each other, and it had been sort of the fence policy that we wouldn't do them simultaneously. But it looks like you're going to be doing that.

Yeah, and that's okay. I think again. We I've always been in the camp of putting the balance sheet on autopilot, essentially starting the process, letting it run until we get and get there. We definitely don't know exactly where that's going to end. The data will dictate when we end that process. I'm okay with doing that because it's in the background, it's running. We need to get back to ample of reserves. We don't know what that number is, but we'll know what won't.

You get an estimate about when that might be.

I do, but I'm not going to it's so uncertain. We had an estimate last time we did this, right, We're off, so I'm cautious about that.

If he told you, you'd have to kill you.

I think that there's this question right now about heading into year end, and Adam Posen was really highlighting this earlier.

There's this anxiety.

About what the fiscal backdrop will do to derail some of the calm, the methodical aspects of FED policy. I don't know that you can or want to comment on basically what that policy could be.

But how much does that keep FED officials up at night?

How much is that part of the discussion what you have to do to respond to any potential expansion of the deficit that could be inflationary next year.

So I say, out of fiscal policy, honestly, you have to respect we have to respond to it exactly. And so I can't speak for the FED either, but for myself. What keeps me up are many risks. That's one of them. Right, There's also if we see what we're seeing around the world, these conflicts get worse. I mean that would be tragic to humanitarian tragedy alone, but the tragedy also to the economy. Hurt to the economy. So there are a lot of risks that keep me up at night. That's just one of them.

Well, well, do tariffs worry more or the deficit depends?

It depends the devils into detail, like what's specific about the tires, what specifically we're investing in in terms of deficit. You know, I'm a simple guy. I think if we're investing is something that's improving the productivity of the American economy, that's a good thing. If we're spending money that doesn't do that, that worries me more. So. Again, it's not just one thing. It really depends on what we're doing.

So you mentioned productivity. We had the big revision to the non farm payrolls this week, but that should raise productivity. You view that as good news offsetting the bad news of Lord John.

That's an interesting that's an interesting way of thinking about it. We were expecting this adjustment. We looked at in Philly FED. We've been looking at this the payroll adjustments, and we knew this was coming. It was a little larger than we expected, but we knew it was coming, so that wasn't a surprise. And it's still a good number overall, if you average out over twelve months, we're still doing just fine in the American economy. But there's a risk there.

Well, we'll see you on September eighteenth. Patrick Harker, President of the Philadelphia FED, thank you very much for joining us on Luberg Radio and Television.