Fed’s Harker Sees Above-Target Inflation, Optimistic Bond Market

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(Bloomberg) — U.S. inflation is set to be contained just above the Federal Reserve’s 2% target, and rising market interest rates are a sign of optimism about the economic recovery from the coronavirus pandemic, Federal Reserve Bank of Philadelphia President Patrick Harker said.

© Bloomberg Patrick Harker, president of the Federal Reserve Bank of Philadelphia, speaks during the the Federal Reserve Bank of Atlanta & Dallas Technology Conference in Dallas, Texas, U.S., on Thursday, May 24, 2018. The title of the conference is ‘Technology-Enabled Disruption: Implications for Business, Labor Markets and Monetary Policy.’ Technology-enabled disruption refers to workers increasing being replaced by technology.

“Our forecast is for inflation to creep up to 2%, and our goal is to have it hit above 2% this year. Our forecast is around 2.1%, but we don’t see it running out of control,” Harker said Friday in a Bloomberg Television interview with Michael McKee.

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Since January, longer-term interest rates have risen as investors have incorporated positive news on vaccine developments and the prospect for massive fiscal aid, factors which should speed the economic recovery. That’s translated into higher borrowing costs for households and businesses, but Harker brushed aside concerns about the effect of higher interest rates on growth.

‘Good Sign’

“This is a good sign, in some ways, that rates — say, the 10-year — is going up,” Harker said, referring to the 10-year Treasury yield. “People are more optimistic about the economy. We’ve been hovering at zero or negative neutral real rates for a while, so the fact that that’s rising is a good sign because it shows optimism.”

The U.S. central bank’s Federal Open Market Committee, on which Harker sits but does not have a vote on policy decisions this year, published updated quarterly economic projections following its meeting last week. The projections were the first since December — before the Democratic party’s victory in January Senate races paved the way for more fiscal relief — and they showed that Fed officials generally see inflation hovering just above the Fed’s 2% target over the next few years.

© Bloomberg Patrick Harker, president of the Federal Reserve Bank of Philadelphia,.

That’s in line with the central bank’s new strategy unveiled last August, in which Fed officials will seek above-target inflation following periods of below-target inflation, so that it averages 2% over time.

“I am of the camp where we stick with our framework and we let inflation run above 2% for a while — not out of control past 2%,” Harker said.

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