More Federal Reserve Interest Rate Hikes Ahead

Harken the words of Harker.

For traders who didn’t, the sudden downturn in the market Thursday after an early upside swell became a trap for traders.

Philadelphia Federal Reserve President Patrick Harker doesn’t like what he sees in the fight against inflation, and he doesn’t expect any weakening of plans to raise benchmark interest rates.

Federal Reserve plans more interest rate hikes

Stock market movement continues to be a choppy state of affairs with the next economic or Federal Reserve (Fed) news event acting as yet another market-moving catalyst.

Following a down day Wednesday, all three major indexes were trending higher early Thursday morning.

Then the Fed stated the obvious.

“As you all know, inflation is far too high,” said Harker, speaking at an event in New Jersey. “Inflation is widespread throughout the economy.

The Fed so far this year has raised the federal funds rate 300 basis points while actively trying to slow the economy.

“We are going to keep raising rates for a while,” Harker said. “Given our frankly disappointing lack of progress on curtailing inflation, I expect we will be well above 4 percent (federal funds rate) by the end of the year.”

He expects the Fed to stop hiking rates at some point next year, but maintain a “restrictive rate” for some time after that point. The Fed could then return to raising rates if needed.

After its .75% (75 basis points) rate hike last month, the Fed anticipates raising interest rates further through 2023, to a level as high as 4.6%. The latest hike raised the target range for the federal funds rate for the fifth time this year, bringing the target range to 3% to 3.25%.

Fed set to battle ‘perfect storm’ of inflation

Harker is dead set on meeting goals, and correcting the “perfect storm” of inflation causes.

“Inflation is a problem that must be solved,” Harker said. “We need to see continued movement toward 2 percent core inflation.”

September U.S. Producer Price Index (PPI) numbers – now at 6.6% annually – show core PPI inflation at more than triple the Fed acceptable level. U.S. Consumer Price Index (CPI). CPI core inflation climbed to 6.6% year-over-year.

Core inflation – closely watched by the Federal Reserve – measures rising costs, less food, energy, and trade services.

Overall high inflation remains solidly in place and trending at a level not seen since the early 1980s.

“While price hikes were limited initially to just a few items like used cars, we’re now experiencing rapid rises in prices on everything from new vehicles and dishwashers to life’s staples, like food, gasoline, and rent.”

Supply chain issues cause inflation bottleneck

Harker mentioned pandemic lockdowns, global supply chain disruptions (along with European war interruptions), U.S. government policies, and housing costs as some of the many contributors to 40-year high inflation.

“As a central bank, the Federal Reserve can do little to affect the supply constraints pushing up inflation,” Harker said. “And as I have indicated, those problems, unfortunately, will take time to resolve.

“But the Federal Reserve can absolutely affect demand, and that is what we are doing,” he continued. “We want to see inflation coming down steadily and consistently, and we also want to see it abating across a wide array of goods and services. The goal is to adjust conditions so that demand better matches supply.”

Harker noted that the Fed has two primary tools for implementing monetary policy: the federal funds rate — usually just thought of as interest rates — and the Fed balance sheet.

Fed touts strength in fighting inflation

Harker believes the Fed is on the right track to bring down inflation over time.

“The Federal Reserve is taking on inflation from a position of relative economic strength,” Harker said. “Our goal of stable prices and maximum employment is achievable, and our resolve is strong.”

“What we really need to see is a sustained decline in a number of inflation indicators before we let up on tightening monetary policy,” said Harker. “I expect that economic growth will moderate this year as both inflation and tightening financial conditions begin to crimp consumption.”

The Fed president sees overall gross domestic product (GDP) growth flat for this year, and not more than 2% the next two years. He also sees core inflation up to 6% this year followed by a decline to 4% and then 2.5% in 2023 and 2024, respectively.

“Inflation will come down, but it will take some time to get to our target,” Harker said.

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