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Well, the Federal Reserve is drawing
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quite a bit of attention these days with
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any potential decisions around interest
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rates, uh, the recent Jackson Hole
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Symposium, and the question of the Fed's
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independence. Pleasure to have joining
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us to talk about all of those topics,
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Patrick Harker, who's former
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Philadelphia Federal Reserve President,
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former Wharton School dean, and back at
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Wharton as a professor of operations,
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information, and decisions, as well as
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director of academic engagement at Penn,
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Washington. Pat, great to talk to you
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again. How are you?
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>> I'm great. Thanks for having me.
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>> So, you were out in Jackson Hole. So
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give us a sense of of everything that
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went on there and obviously the comments
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by uh chair pal after the symposium was
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completed.
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>> So I think there are some shortrun and
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long run um feelings that I take away
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from Jackson Hole. In the short run uh
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there are clearly the the chair did
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signal openness to a September cut. Um
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personally I'm a little skeptical about
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that. I think that the data is very
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mixed. kind of feels a little like
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stagflation light is upon us. Now, I
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hope that's not the case. It's not the
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1970s. Let's be clear, right? We're not
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talking about that kind of stagflation,
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but you know, inflation's running above
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target. It just seems to be stuck there,
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maybe even drifting up. Uh unemployment
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is hanging in there. We're not seeing
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any real move there. Uh quits are easing
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some, so people clearly feel a little
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jittery. On the consumer side, uh the
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Philly Fed just put out its most recent
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life survey. Uh this is a survey we
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started when I was there, the labor,
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finances, and expectation survey of
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consumers across the country. And that's
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not it wasn't great. Net optimism is
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down. There's clearly people who are
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either cutting back on discretionary
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spending. Some are cutting back on
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>> spending they have to do um and they're
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skipping payments increasingly. Uh the
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sentiment is the lowest it's been for
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quite a while actually since the
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inception of the survey. So there's a
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there's an there's a funk I would say
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use a technical phrase right there's a
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funk that's settling in that's
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disturbing.
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>> Yeah. And so from that perspective, does
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it make you think that,
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you know, is there a rate cut probably
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more in line in the near future? And I
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I'll keep that wide near future doesn't
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necessarily have to be September, but at
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least sometime by the end of this year
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because of some of those dynamics you
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see.
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>> So my last SP, which was June, the the
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dot plot, the survey of economic uh
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projections, I had two forecast, two
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rate cuts in for this year. I still
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think that's probably right. So, uh, we
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pro we need to start easing down. The
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other part that isn't getting a lot of
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attention, the Fed did slow the
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reduction in the size of the balance
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sheet uh on purpose. Um, I would be in
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the camp of just stopping the reduction
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altogether right now. Just sit there for
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a while and go flat in terms of the
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size. Liabilities will eventually build
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up and drain reserves more. So, I think
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there's some things they could do, but
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dramatic cuts right now don't seem in
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the forecast. I just don't see it.
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>> Where do you think that target number is
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then for the Fed? And obviously, some of
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this is still a moving target because of
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the dynamics in the economy, but I think
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a lot of people have a belief of, you
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know, if we see the Fed eventually, and
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it may be over a two-year window in that
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three to three and a half% range that
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maybe that ends up being the target.
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>> Yeah. So it all depends on where you
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think the real the our star is, right?
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The real rate, the neutral real rate.
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And there's wide divergence of opinion
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in the economics profession and on the
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street about that. Some of it's betting
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on productivity gains from AI and that's
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possible. Um others are more pessimistic
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thinking it's still hovering around 0.5
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to 1%. So if you in that if you're in
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that camp then you're looking at a
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neutral rate a nominal rate of the Fed
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funds rate of three three and a half
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roughly.
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>> What do you what do you think are the
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areas that obviously the leaders of the
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Fed the governors will be focusing on
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but for us on the outside
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because it seems like business news and
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business data is more uh on our
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fingertips than ever before but what are
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some of the areas that we should be kind
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of keeping our own eyes on. So, this
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gets to my second point. It is a point
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that may sound heretical and so I be
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clear, but stop obsessing about 25 basis
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points up or down with the Fed fund
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rate. I understand bond traders, this is
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your business. This is how you make a
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living. But the problems we have in the
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economy are not the Fed. That the
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problem is not the Fed. The Fed knows
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what it's doing. It will make mistakes.
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Sure, we make mistakes from time to
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time, but that's not where the real
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action is. And by the way, moving the
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Fed funds rate is not going to move the
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rates that Americans care about, right?
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Credit card rates, mortgage rates, and
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so forth. In fact, if you look that
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since November, the 30-year rates gone
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up what, 32ish, you know, over 32 basis
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points. The 10 years been flat. And
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given how much supply we're going to be
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putting into the market with the deficit
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spending, why would you expect the long
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rates to come down anytime soon? Unless
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you see a big surge in demand, which I
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don't see. So, you know, the
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administration can ask all they want for
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the rates to come down, but the Fed
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doesn't control the long end of the
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yield curve, the the end that people
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care about. And why is that the case?
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Well, there are broader economic issues
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that I'm concerned about. One of the
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themes of the Jackson Hole meeting was
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our our fertility rate and the issue of
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will we have the labor force. We're not
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replacing ourselves. We are going down
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in terms of the size of the labor force
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because we with immigration net
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immigration turning negative. Now, I'm
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not commenting on whether that's a good
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idea or bad idea socially, but
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economically it's not a good idea. We
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are going to and our friend Ken Smeters
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in the penorton budget model has done an
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analysis of this. It's just not moving
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the needle in the right direction with
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where we are with economic policy.
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>> Before I let you go, I did want to
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approach the topic of Fed independence,
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which is obviously on a lot of people's
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minds right now. Uh with all that we
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have seen gone on, the back and forth
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between the White House and the Fed, how
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are you viewing what we are seeing play
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out right now?
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>> Oh, it's not it's dangerous. very very
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dangerous for the country. There's never
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been a case where breaching the
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independence of the the bank over the
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long run, the central bank, ours or
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anywhere in the world, has turned out
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well. It just doesn't happen. When
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political interference gets into the
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business of the central bank who has to
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do things that people don't like from
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time to time, uh like raise rates, that
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it puts us in a dangerous position. Now
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that said, the Fed, every central bank
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has to earn the right to be independent.
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It's not something that we just take for
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granted. And we earn that right by doing
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our job all the time. And also, I put
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this in a Wall Street Journal piece
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recently.
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The independence is also incumbent upon
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the American people realizing what the
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Fed can do and what it can't do. often
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because of some dysfunction we see in
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other parts of government, the Fed is
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asked to do things it simply is not
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legally allowed to do and frankly can't
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do. For example, we could move the long
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end of the yield curve if we went into a
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quantitative easing cycle, but we only
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do that in an emergency. And it's hard
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to argue we're in an emergency right
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now.
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>> So be clear on what the Fed can do, but
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also be clear on what the Fed can't do.
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So when you criticize the Fed, you may
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not be criticizing the Fed. You may be
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criticizing conditions that you think
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the Fed can solve, but it's not designed
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to solve those.
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>> Pat, always great insight and uh
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obviously great to have you back at
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Wharton. All the best and look forward
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to talking to you uh in the months
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ahead.
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>> You thank you Pat Harker, former
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Philadelphia Federal Reserve President,
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former Wharton School dean, and
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currently uh professor of operations,
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information, and decisions here at the
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Wharton School.
