Patrick Harker, president of the Federal Reserve Bank of Philadelphia, spoke with Yahoo Finance to discuss challenges to the labor market and where Fed policy is headed next.
Below is a transcript of his appearance on March 3, 2021.
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BRIAN CHEUNG: Well thank you so much for joining us this afternoon, President Harker. I just want to start off the conversation with broadly speaking, how is the vaccine rollout going in your district? And what do you have as an updated economic outlook as we continue to try to get to the light on the other side of this tunnel?
PATRICK HARKER: Brian thanks for having me today. So we cover three states, Pennsylvania from east of Johnstown, Delaware and Princeton, New Jersey south. So we're a small district, but a pretty diverse district. So the vaccine rollout is different in each of those three states, different processes, different pace. It's happening in New Jersey. I can say we are starting to see the vaccine rollout. That's really good news. There still is vaccine hesitancy, and we need to confront that and we need to make sure that people are getting the vaccine when it becomes available.
What that means for us in terms of our forecast right now: We're looking at a forecast of about 3% to 4% growth this year. Probably a little more than 3% in the first half of this year. Second half of the year, we're looking 5% to 6%, call it five-ish and coming in with a little more than 4% growth by the end of the year, with unemployment hovering a little north of 5% is our forecast. And inflation is still running below our 2% target, we're looking at the end of this year around1.7%. What that means for us. We put into that forecast, a $900 billion stimulus package. We'll see what comes out of Congress, and that may change our forecast going forward. But right now we think that we are climbing out of this situation. It’s going to be bumpy. And there are still people who have significant issues that need to be dealt with as we come out of this pandemic crisis.
BRIAN CHEUNG: So President Harker I want to drill on that point you said that your assumption and your economic forecast is for $900 billion. That's not the $1.9 trillion that's being proposed right now. Why did you pick that number, and if it is the case that it ends up being something close to 1.9. Is there a risk of the economy overheating?
PATRICK HARKER: Let's define overheating. I think that word gets thrown around a lot, but I think we need to define it. For us at the Fed we've been under running our 2% inflation target now for a long time. So as long as inflation rises to 2%, and with our new monetary policy framework, above 2% for a period of time. We're good with that. But we don't want to see inflation running out of control. At this point, I don't see signs of that. We just don't see signs of inflation running past 2% in a very rapid fashion. And so it's not just the level above 2% that matters. It's how quickly the inflation rate is moving. Right now we're just not seeing it right. It's still bumping around, we're still looking at our forecast below 2%. And so while it's always a concern, and we have the tools to deal with that, if inflation starts to accelerate beyond what we deem acceptable, I don't see that as an outside risk right now.
BRIAN CHEUNG: Now it seems like those inflationary pressures are something though that the markets are watching very closely and I want to bring up, and your yield is looking like at about 147 basis points right now some of that might be on the expectation that the Fed might hike earlier if inflation starts to rise maybe faster than expected. So implied pricing might suggest a 25 basis point hike even in 2022. Are those expectations right or wrong from where you stand?
PATRICK HARKER: For me, that is not my forecast. I can only speak for myself and not for my other colleagues or the [Federal Open Market Committee]. But for me I’m not looking at a hike anytime in 2022. If there is one, it’s towards the later end of it or in 2023. I mean I think we got a ways to go. There's a lot of uncertainty. The thing that I really want to emphasize here is, there's so much uncertainty still in the economy, but I think we just have to take all of these forecasts, with many many grains of salt, and really just hold on to where we are. Let’s climb out of this pandemic, and then see where we go. Now, we are starting to see some inflation expectations rise. I mean the [Treasury Inflation Protected Securities], 10 year-breakeven is rising. And that's, again, from my perspective that's a good thing. Because we want to see inflation expectations anchored at 2%. And if inflation rises slightly above 2%, that is more than acceptable. That's actually what we want for a period of time.
BRIAN CHEUNG: So, could the Fed though still need to maybe at some point, address, longer term borrowing costs if they rise too high, something like a yield curve control? I know that the views are expressed today are of your own and they don't represent the FOMC but from where you stand do you see maybe an argument for deploying some sort of tool like that if it continues to rise?
PATRICK HARKER: I think there's a host of tools that we have right again. We think a lot about the Fed funds rate, the interest rate, but we also have our asset purchase program, and a host of other things like yield curve control are possible. But at this point, all those are under discussion, and I wouldn't take anything off the table. But at this point, I am currently, given the hole in where we are, let's climb out of this crisis. And this is for a very simple reason, right. When you're in the middle of the crisis, the fewer things you can change, the better. Let's focus on the things that really matter. And then we'll start to deal with these other things as we climb out of this pandemic.
BRIAN CHEUNG: And on quantitative easing the Fed has made it clear that it won't begin tapering until you see that “substantial further progress” towards your dual mandate but it's also coming alongside what seems to be improving economic outlooks like you just laid out at the beginning of this interview. So how do you balance those two things and when do you think that we might be able to get to a point where we do hit substantial further progress whatever that means.
PATRICK HARKER: I'm reluctant to put a date on it because it really does mean that what is driving this is our dual mandate goals. And given the uncertainty and all the forecasts, I think if you talked to forecasters, we've got our own talk to forecasters — the survey of professional forecasters that we've run out of Philadelphia — there's a lot, still a lot of uncertainty in these forecasts. So I'm reluctant to put any date on when we start to reduce asset purchases. That said, I think the playbook will be very similar, not identical, but very similar to what we did, after the Great Recession, right. We'll start that process, and then we'll start to slowly methodically raise rates. Unless of course some unexpected event happens in which case we respond appropriately.
BRIAN CHEUNG: Well certainly it seems like the uncertainty is still definitely very present despite the fact that the vaccine is coming back but I want to shift over to a conversation about the labor market and what the Philadelphia Fed is going to be doing, we're going to talk about that tool on the other side of this break. We'll be right back here with the Philadelphia Fed president on Yahoo Finance.
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BRIAN CHEUNG: Welcome back to Yahoo Finance I'm Brian Cheung joined here by Philadelphia Fed President Patrick Harker for a look at the U.S. economy and where Fed policy may be headed next. I want to spend the next few minutes talking about the labor market. So the Philly Fed recently launched this tool called the Occupational Mobility Explorer to address the skills gap. It's pretty nifty: if you're a baker that's out of work, the tool might suggest a new job like maybe a butcher — and the skills that are needed to make that jump. And it's even tailored to metro area. What role do you see this tool playing, President Harker, within the context of the COVID recovery? There's been a lot of structural changes in the labor market, what does this do?
PATRICK HARKER: Exactly. So I'm really excited about this tool and the work that we're doing in Philadelphia and also in this case, our colleagues in Cleveland. So here's the situation: we had a great economy, it's hard to remember before the pandemic, but we had a great economy. The labor markets were tight and companies started to get more creative about bringing people off the sidelines into the workforce. Excellent for the companies, and for those individuals and their families. Of course the pandemic has reversed a lot of this, particularly for low-income families, particularly for Black and Latinx families. And so what we're concerned about, everybody talks about the K-shaped recovery. But that's in our hands to some extent right, collectively. We can do something about this. And so that's what this tool is going to do. So the researchers first looked at 33 metro areas across the United States and they asked the following question: what are those low-income jobs that have a partner in a higher income job to pay at least 10% more, where you don't need a four year college degree, what we call “opportunity occupations.”
And they looked at these, about half the jobs they looked at, there was that match with an average increase in annual salary of $15,000. So this is real money. This tool went one step further. It took those 33 metro areas, and look specifically at OK, what are the career pathways that people might have. And so this tool gives you both a pathway and are those jobs growing or not in your region.
So let me give me two examples of kind of jobs that are out there. But let's say you're a bill collector in Philadelphia. You have skills. And that's the other thing, just because you're low income doesn't mean you don't have skills, everybody has a certain set of skills. And so how do you use those skills and get rid of some of the other impediments to those opportunities? And we can talk about that too, but just on the skill side, how do you use those skills to maybe upskill a little bit to get a new job? So you’re a bill collector, you can become a credit counselor, with an average increase in salary of 45% in Philadelphia. Or let's say you're a maintenance mechanic in Cleveland, you could be a truck mechanic, a diesel mechanic, or an HVAC mechanic, with an average increase in salary of 22%. So these are real opportunities. The other nice thing about the tool is, it's not just that one leap that you can look at that. That is, go from where I am now to the next move. But you can actually look at subsequent moves and see how you can build out your career. This tool can be useful for people who are looking to make those changes, for community colleges looking to develop curricula, for community organizations for employers. This is a very powerful tool I'm very excited about.
BRIAN CHEUNG: Now you bring up the disparity that exists. And a jarring statistic in Pennsylvania: the Black unemployment rate is 17.2%, whereas the white unemployment rate 7.8%. That's a massive, almost 10 percentage point gap. How does that disparity factor into how you're assessing where the labor market is. And in addition to that, this tool might be one way to address that but it can't be the only tool right?
PATRICK HARKER: No. So, in addition to this skills development right taking any. A lot of this is due to the fact that Black and Latinx families typically have low-income jobs in certain communities. Not everywhere of course, but in certain communities. This tool helps those communities, and the people supporting those communities to develop a plan. And so, this is one. But there are many. One issue: the skills gap. But it's not just the skills gap. We know that other things play an important role here. We've seen this with women in particular who have dropped out of the labor force during this pandemic. There's childcare issues, there's elder care issues, there's transportation issues, there's housing issues. The list goes on and on. There's lots of impediments. And so what we advocate, what I advocate, is instead of playing what I'll call whack-a-mole, let's go fix the skills gap, or let's fix the childcare issue. You really need to move all these in tandem to help people get into the labor force. We were doing that again before the pandemic hit, because companies, organizations, saw it in their self interest to do that, given what was happening with the tightness of the labor market. This has accelerated and some of the bad side is accelerated to some extent because of things like automation and so forth, that's inevitable. So we need to be proactive in helping people get the skills they need and reduce the barriers, the other barriers we talked about, to full employment.
BRIAN CHEUNG: And you bring up some of those structural secular changes that existed before the pandemic, like changes to productivity that maybe leads to some of that structural unemployment. But obviously the closures of businesses in the midst of this pandemic might lead to structural damage that may even prevent people who want to use this tool from making that pivot. So the Fed has a blunt instrument when it comes to interest rate policy. So how does the Fed think about actionable other things to do when it comes to trying to close that gap?
PATRICK HARKER: That's our community development function. The thing that people often don't know about the Fed, in addition to monetary policy which is of course the headline event, is that we do tremendous work really coming out of our Community Reinvestment Act function and supervision, in helping communities understand where they are, where they can go in providing that research. And in this case, specific tools, and there's other work that we're doing in other areas as well. And for example, at the Philly Fed we've launched something called the economic growth and mobility project or EGMP that's really addressing these three areas right. Getting the jobs that pay above median wages, good jobs, opportunity occupation jobs. Getting people the skills they need to get those jobs, and then having the infrastructure — housing, transportation, child care, you name it — that’s there so they can get to the job or the job can come to them if they don’t have broadband access. So this is inactive area of research for the Philly Fed and really across the Federal Reserve System.
BRIAN CHEUNG: So a final question to wrap up on, we were at 3.5% unemployment rate on the headline rate headed into this pandemic. How far are we right now, from maximum employment?
PATRICK HARKER: We’re a ways off. It's hard to actually pick a number maximum employment, and what the natural rate is. That varies a lot and you really don't know it until you see it, that is inflation starts to take off and wage inflation in particular starts to take off, so we don't know exactly what that number is. But my view is, I'm a pragmatist by nature. We were down at those low levels before the pandemic. That kind of should be our goal. We know the economy can get there, that is we were there with low inflation, and we were starting to see tremendous creativity across the economy and bringing people into the labor force bringing people into work, bringing people into family-sustaining jobs. We can get back there, we just have to do it as a collective, we have to do it together.
BRIAN CHEUNG: Alright, well hopefully we can get back to that point relatively soon. but again the Occupational Mobility Explorer, you can find that on the Philly Fed website but again, Philadelphia Fed President Patrick Harker thank you so much for joining us on Yahoo Finance today.
PATRICK HARKER: Thanks Brian.