MNI INTERVIEW: Fed Close To Done Cutting Rates, Says Harker

The Federal Reserve is unlikely to lower interest rates much further and any politicized effort to force officials to do so might be counterproductive by causing a spike in longer-term borrowing costs, former Philadelphia Fed President Patrick Harker told MNI. 

“I think the committee played its hand with the last SEP – they’re not looking at dramatic cuts,” said Harker, pointing to the December Summary of Economic Projections that showed a median estimate of a single rate cut for 2026. “The market thinks two cuts this year. I'm more in the camp of one, but with a lot of uncertainty around that forecast.” (See: MNI INTERVIEW: Musalem Warns Easy Fed Policy Unadvisable)

Harker said President Donald Trump’s calls for the Fed to push rates down will be met with resistance by an overwhelming majority of the FOMC, even after the upcoming appointment of a new chair to replace Jerome Powell – unless the Supreme Court allows the president to fire Governor Lisa Cook in a looming case. 

“What happens with the change of chair? Some of that depends on what Jay does. Does he stay on (as governor) or not? I don't know the answer to that. But all the presidents got reappointed, except for the new president coming in in Atlanta. So you're not going to see a huge shift in the composition of the FOMC. So a new chair can come in but they don't necessarily get their way,” Harker said in an interview Tuesday. 

SUPREME CAVEAT

The one major caveat to that would be a White House victory against Cook at the Supreme Court. Trump has attempted to fire the Fed governor in a highly disputed case, which if successful would effectively dismantle central bank independence, said Harker, who retired from the Philly Fed last June after leading it for a decade. 

“If the court sides for the administration, run for the exits, the bond vigilantes will come out with a vengeance,” he said. 

Even short of such an outcome, any effort by a new Trump-appointed chair to browbeat the rest of the FOMC into cutting rates aggressively might actively backfire, said Harker, especially since the president has explicitly stated that his goal is to lower interest payments on the debt. 

“What does he want to lower? He can lower the Treasury bills’ (yields). But as the Treasury goes out on the longer end of the curve, it’s not going to have a lot of effect. Because these other things, including this out of control deficit we're running, are affecting the longer end of the market,” said Harker.

“Like today – I mean, we just threatened to take over Greenland, and the market responds, and I think appropriately responds. So they may not get what they're wishing for. I don't see, given the dynamics and the forces in the global economy, why the long end of the curve would come down dramatically.”

NEAR NEUTRAL

Harker said the Fed’s current policy stance is close to, perhaps slightly above neutral. He expects the economy will grow around 2% this year and perceives risk to both sides of the central bank’s mandate. (See MNI POLICY: Fed Warms To Productivity Step-Up, Rethinks Risks)

On the inflation front, Harker noted price pressures that are still too close to 3% for a good central banker’s comfort, a trend he fears could make the public doubt policymakers’ commitment to their 2% goal. 

“I'm worried about that, because that runs the risk of just deanchoring of inflation expectations because everybody will say, well, it's going to be 3% going forward,” he said. 

As for the labor market, he cited signs of softening but also some reason for caution around the data itself given all the demographic forces affecting employment, ranging from tariffs to immigration. 

"A lot of other policy issues are affecting the labor market well beyond what the interest rate is, and so I'm not sure even if the Fed wanted to make a significant move in terms of the dual mandate of employment that it's going to have a lot of effect,” Harker said.