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