Fed's Harker: Timing of first central bank rate cut may be close

By Michael S. Derby

(Reuters) -Federal Reserve Bank of Philadelphia President Patrick Harker said on Thursday a rate cut is the next step for monetary policy and the timing of that action is getting closer, although he declined to say when the central bank will be able to lower the cost of short-term borrowing.

“I believe that we may be in the position to see the rate decrease this year,” Harker said in a speech given before the 2024 Lyons Center for Economic Education and Entrepreneurship event, hosted by the University of Delaware. “But I would caution anyone from looking for it right now and right away,” he said. "We have time to get this right, as we must.”

In comments after his formal remarks, Harker said a May rate cut was possible but not likely, as he's eyeing the start of action some time in the second half of the year.

Harker said he needs a couple more months to gain confidence the economy will support an easing. Whatever the Fed does will be driven by incoming data, he said, adding when it comes to a cut, "I think we're close, give us a couple of meetings."

Harker, who does not hold a voting role on the rate-setting Federal Open Market Committee (FOMC) this year, spoke on a day in which a number of Fed officials were also weighing in on the outlook for the economy and monetary policy.

On Wednesday the Fed released minutes from its January FOMC meeting that showed officials eying rate cuts, albeit cautiously. Fed Chair Jerome Powell has already taken the Fed’s March meeting out of the running for action, and markets are currently expecting an easing to come some time in the summer.

Harker drove home the point that when the Fed does cut rates it must act at the right time. “I find our greatest economic risk comes from acting to lower the rate too early, lest we reignite inflation and see the work of the past two years unwind before our eyes,” he said.

The bank president said that inflation is moving back to the 2% target but he still wants more evidence it is doing so durably. He noted the so-called last mile of hitting the target could be challenging.

Recent higher-than-expected consumer price level inflation was a reminder that progress on lowering price pressures can be bumpy and uneven, he said.

When it comes to gaining confidence inflation is on track for 2%, he said he was not looking for much more data. "I just wanted to get a couple more months" of news to be sure.

Harker also said U.S. growth continues to be strong, and the robust labor markets are coming into better balance. Harker also said news of job layoffs doesn't look to be a recessionary signal to him, adding that he views the consumer sector as strong.

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Harker also weighed in on the Fed’s balance sheet drawdown effort, which sees the central bank trimming its bond holdings to withdraw liquidity from the financial system. He said market liquidity levels remained strong, and echoing the meeting minutes, he expressed support for slowing the pace of the drawdown before stopping it.

Harker said that was important because there is great uncertainty about the point where liquidity will grow too tight in markets.