Despite a worrying indicator weighing on the economy and an ongoing interest rate hike, Philadelphia Federal Reserve Chairman Patrick Harker said on Tuesday he does not believe the United States is headed for a recession.
This view, voiced in a CNBC interview, comes in the face of an impending reversal in 10- and 2-year Treasury yields and market expectations that the Fed is about to embark on a bullish cycle. rates aimed at curbing inflation.
Harker said he believed the current state of the economy was strong enough to withstand both tighter monetary policy and bond market fears about what that would mean for growth.
“What I’m looking for is a safe landing,” he told CNBC’s Sara Eisen during a “Power Lunch” interview. “It might be bumpy along the way. It was bumpy going up, it’s going to be bumpy going down. We’ve all been on those planes. We’re landing safely, but it would be a little exciting. I don’t C That’s why we’re careful and careful about how we implement policy.”
Comments came with the roughly flat curve between the benchmark 10-year and its 2-year counterpart. The curve has inverted, with the 2-year yield above the 10-year, in recent US recessions, although this has not been a guarantee.
Harker warned against relying too much on a relationship when trying to predict the future.
“The evidence is mixed. If you look at the data, it’s clearly correlated with recessions. But the causality isn’t very clear,” he said. “So we have to make sure we’re looking at a lot of different data.”
Yield curve inversions are considered an important sign because they reflect investors’ fear that the Fed is tightening conditions too much to the point of restricting future growth. They also tend to inhibit lending from banks that fear future returns will be lower.
However, unemployment in the United States has returned to near its pre-pandemic level, when the jobless rate hit its lowest level in 50 years. Consumers continue to have cash and property values continue to rise.
But the Fed has been grappling with inflation levels hitting a 40-year high, prompting Harker and his colleagues to embark on a rate-hike cycle in which markets expect hikes every of the remaining six meetings this year, with perhaps as high as half a percentage point.
Harker said he thinks the Fed at its May meeting should raise its benchmark rate by just a quarter of a percentage point, or 25 basis points. Markets, however, are expecting a 50 basis point hike, and Harker said he remains open to the idea based on the data.
“I wouldn’t take it off the table,” he said of the top move.
Even with the prospect of much higher rates, he said he believes the Fed can navigate its way through the current situation, with a focus on reducing inflation first.
“It’s the first job,” he said. “I don’t want to overdo it, though, and try to put the brakes on hard and end the growth.”
“I think it’s going to be a bumpy ride, and there could be some issues where we enter a period of below-trend growth for a while,” he added. “But I think we can get there.”