WILMINGTON — The president of the Philadelphia Federal Reserve Bank is worried about the impact of inflation on economic recovery within Delaware and throughout the nation.
“Economic growth and employment are robust, but I’m very concerned about inflation,” said Philadelphia Fed President and CEO Patrick T. Harker.
Dr. Harker, an engineer by trade, went on to become an educator, eventually rising to lead the University of Delaware as its 26th president. He was appointed to lead the Philadelphia Reserve in 2015 and was reappointed to another term in 2021.
On Wednesday, Dr. Harker addressed the Delaware State Chamber of Commerce in a virtual session that focused on his economic outlook for Delaware and the nation.
He began his presentation with the positive side of the ledger.
In the fourth quarter of 2021, the national gross domestic product grew at an annualized rate of 7%. In total, U.S. GDP grew 5.7% in 2021.
“That this occurred in the midst of a deadly pandemic is quite a testament to the underlying strength of our economy,” Dr. Harker said.
The Philadelphia Reserve is a constant observer of job growth in the region and the nation. For the past 11 months, the organization has tracked the creation of more than 400,000 new jobs.
“If you think that has led to a decline in help wanted signs, you’re wrong. Even with all this job creation, vacancy rates remain elevated at a near record,” Dr. Harker said.
The labor participation rate has climbed recently, though it is still below pre-pandemic levels. Dr. Harker attributed that to the impacts of COVID-19 and inflation forcing some to stay in their jobs and delay retirement.
“The (U.S.) unemployment rate, which is below 4%, should continue to fall this year,” he said.
In the First State, Dr. Harker said, “The recovery continues apace.”
“The unemployment rate is nearing pre-pandemic levels, overall gains in payroll employment have been steady, labor market conditions are tight and the housing market remains hot,” Dr. Harker said Wednesday.
While some industry sectors have seen positive movement recently, in Delaware the leisure and hospitality segments remain somewhat depressed.
“The problems are acute here. To cite just one statistic, Delaware families spend 20% of their median household’s income to care for one child, an unsustainable burden.
“There are problems. We had problems before the pandemic but there is one looming problem — the 10% elephant in the room is inflation,” he said.
“Inflation is running far too high, and I am acutely concerned about this.”
The consumer price index was up 10% annualized in February, led by a significant increase in energy prices. During the last year, the price index is up 7.9%.
Dr. Harker attributes the rise of inflation to the war in Ukraine, and COVID-19 in parts of China’s major manufacturing centers.
“Inflation is widespread. It is showing up throughout a vast array of goods that comprise the CPI ‘basket,’ and among some of those that aren’t in the basket,” he said.
“The bottom line is that generous fiscal policies, supply chain disruptions and accommodative monetary policy have pushed inflation far higher than I — and my colleagues on the (Federal Open Market Committee) — are comfortable with. I am also worried that inflation expectations could become unmoored.”
In response to inflation pressure, the Federal Reserve raised the federal funds rate — the rates banks pay to lend funds to other banks — for the first time since 2018. The goal is to increase the cost of credit throughout the economy, forcing people to reduce their spending which, in turn, slows the rate of inflation.
Dr. Harker predicts that the Federal Reserve will begin reducing its holdings of Treasury securities, agency debt and mortgage-backed securities soon — efforts also hoped to reduce inflation.
He added that he thinks, with everything happening in the world presently, economic growth will be moderate this year.
“We can probably expect 3% GDP growth this year before falling to trend growth of 2% to 2.5% during the next couple of years,” Dr. Harker said.
He believes that inflation will also start to taper off this year, too, but remain elevated.