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Economic Outlook
Economic Leadership Forum
New Jersey Bankers Association
Somerset, NJ
January 17, 2020

Patrick T. Harker
President and Chief Executive Officer
Federal Reserve Bank of Philadelphia

The views expressed today are my own and not necessarily those of the Federal Reserve System
or the Federal Open Market Committee (FOMC).

Economic Outlook
Economic Leadership Forum
New Jersey Bankers Association
Somerset, NJ
January 17, 2020
Patrick T. Harker
President and Chief Executive Officer
Federal Reserve Bank of Philadelphia

One of the things I’ve noticed about this job is that people find me a lot more interesting when I’m a
voting member of the FOMC. So I won’t take it personally that the last time I spoke to this group was
almost exactly three years ago …
Some things look very different in 2020 than they did in 2017. The makeup of the Fed’s Board of
Governors has changed. We are in a different part of the business cycle. My outlook for interest rates is
markedly dissimilar. But some things have held firm. Specifically, while the outlook for rates may be
starkly different, a lot of the phrases I used to describe the state of the economy back in 2017 still
apply today.
That’s positive news and pretty amazing when you consider how much the world has changed since
Today I will touch on three issues that are integral in today’s banking world. The first is the economic
outlook, a key driver for loan demand and investment opportunities. The second is an aspect of
monetary policy that has been in the news over the past few months; namely, how the Fed is
normalizing its balance sheet. Last, I will touch on the ongoing efforts around modernizing the
Community Reinvestment Act (CRA).
Let me begin with the standard disclaimer — which I used three years ago — about my views being my
own and not necessarily reflective of anyone else in the Federal Reserve System.
The Economic Outlook
Overall, the economy is looking pretty good. We are in the longest economic expansion on record, and I
see growth returning to trend of about 2 percent this year, a view that is widely shared.


Just as I said last time I was here in 2017, I will note that the labor market continues to show
considerable strength. In fact, it has outperformed most people’s expectations, with continued job
creation, continued low unemployment, and more people continuing to come off the sidelines.
At some point, we’ll return to a trend of creating about 100,000 net new jobs per month. I’ve said that,
too, in years past, and it hasn’t yet come to fruition, which is great for the American workforce. And
when we do return to trend — whenever that may be — it’s important to note that, while 100,000 jobs
a month may look disappointing in comparison with the strong numbers we’ve seen over the past
several years, it will more than keep pace with growth in the labor force.
More good news in the labor market includes the fact that wages on the lower end of the pay scale have
finally started to rise — as they have on the higher end — although midrange paychecks could still use a
The continued strength of the labor market has contributed to booming consumer confidence. And with
consumer spending making up some 70 percent of the U.S. economy, that makes it the hero in the
growth story. Business investment, however, is lagging, and the uncertainty attached to fiscal and other
policies, has continued to hold it back. So, too, have international developments, including the global
slowdown, trade uncertainty, and geopolitical tensions.
Here’s something else I said in 2017 — and in 2018 and in 2019 — while we haven’t quite met our 2
percent inflation target, we’re on track to get there. I still believe that inflation will rise to meet our goal,
albeit slowly, and we’re closing in on the target. But it has been a long time coming. To most people, this
is a purely academic problem — who else but policymakers are going to complain that inflation is
hovering below 2 percent? But because of our dual mandate, focusing on the inflation rate is more than
an academic exercise.
New Jersey’s Economy
As for the Garden State’s economy, some numbers show New Jersey outperforming the nation, and
others show some shortfall — but not by a lot. And as a lifelong South Jersey boy, I am happy to say our
state’s economy is in good shape. Job growth has hovered around 1 percent over the past three years, a
little below the U.S. rate of about 1.5 percent. However, the unemployment rate is 3.4 percent, which is
slightly better than the national average. That is despite the fact that New Jersey’s jobless rate has
ticked up in recent months. But even here, I view the news as positive. That’s because the rise in the
rate reflects more people coming back into the labor force. The state’s labor force participation rate has

risen from about 62 percent last summer, to 63.6 percent at the end of 2019. That suggests more
residents are feeling confident about the labor market and their ability to find work.
I should mention that the Philadelphia Fed’s own state leading index for New Jersey recently turned
negative. But that reflects the rise in the jobless rate. Since that rise is the result of more people coming
into the labor market, I am not worried about New Jersey’s economic future.
Monetary Policy
The main subject of this speech is monetary policy. While it is usual to discuss interest rates, today I
want to touch on another key aspect of monetary policy going forward, and that is the Fed’s efforts to
normalize the balance sheet. This has received great attention lately, ever since the repo market
problems of last September.
As you know, at the start of 2019, the FOMC decided that we would continue to conduct monetary
policy in a regime of “ample reserves,” in which control over the federal funds rate is exercised primarily
through the setting of administered rates, and the supply of reserves does not need to be actively
Shortly after that, we announced our plan to cease asset redemptions and hold the balance sheet to
roughly a constant size come September. As currency and other non-reserve liabilities grew, aggregate
reserves naturally declined. Our end game was for reserves to reach a level “consistent with efficient
and effective implementation of monetary policy.”
There were two primary objectives to this approach. First, to reduce uncertainty about asset purchases
by announcing our plans well in advance. Second, to approach the necessary level of reserves, which is
itself filled with uncertainty, with an abundance of caution.
We only have estimates of the demand for reserves, although we’ve conducted a great deal of research
around the Federal Reserve System, including continued conversation with market participants. In fact,
staff at the Philadelphia and New York Feds were among the first to identify that the need for reserves
could be much larger than initially anticipated. To be on the safe side, it made sense to move slowly,
buying time to carefully observe market developments and better assess their implications. That is, we
gave ourselves time for the inevitable “unknown unknowns” of life.
Just such an unknown arose in September.


The episode was clearly triggered by the outsized flows of funds to the Treasury. But the dates for tax
payments and bond settlements are not a surprise; they are fixed on the fiscal calendar and well known
to both policymakers and markets. Everyone was expecting large liquidity flows.
The impact, however, was clearly much larger than anyone anticipated, markets included.
The repo market took the brunt of the impact, as the Secured Overnight Financing Rate (SOFR) rose
above 5 percent on Tuesday, September 17, with some trades executed at rates as high as 10 percent.
While this was certainly not an average day, it’s important to note that the repo market did not freeze.
The volume of secured overnight finance remained steady, at the $1.2 trillion level it had maintained for
the past several months.
The funding pressures in secured markets passed through to the federal funds market. The effective
federal funds rate rose to the top of target range on Monday the 16th, and surpassed the top of the
range by 5 basis points the next day.
We immediately took action to ensure that the effective fed funds rate returned to, and stayed within,
the target range. The very next day, the Desk started repurchase operations to stem the pressures on
money markets, and these actions have continued — including term operations — to date.
In October, the FOMC decided to restart asset purchases to keep reserves at or above the level reached
in early September, at a little over $1.5 trillion. Additionally, the Desk has been conducting term and
overnight repurchase agreement operations to offset money market pressures — for instance, the
quarter-end dynamics that are inevitably more burdensome at the year’s end. All in all, since
September, we have supplied about $400 billion in additional reserves; about $250 billion via repo
agreements, and the rest in asset purchases.
These measures clearly worked, with the effective fed funds rate maintaining a virtually constant level
since October, and repo markets staying calm. Instead of wreaking havoc, the year’s end was a nonevent.
Going forward, the Committee remains committed to implementing monetary policy in a regime of
ample reserves, which, again, does not require active management of the supply of reserves. The
Treasury purchases announced in October will continue until at least the next quarter to ensure we
meet that goal.


Central to this event is the question of why liquidity did not flow smoothly to where it was needed most.
Are some of the market’s pipes rusty? Clogged? Are more needed? Has regulation inadvertently
contributed to some erosion or blockage?
Another question is whether the Fed ought to expand our toolkit — whether we could, or should, do
more to ensure interest-rate control. One possibility under discussion is a standing repo facility. We are
in the process of evaluating such a facility’s potential costs and benefits, and exploring possible designs
as well as alternatives, so it is still very much in the discourse, rather than the decision, phase.
While September’s turmoil offered perhaps too much excitement, it also provided a good deal of
information. It showed that we need a larger pool of reserves than most of our estimates had initially
indicated. It showed that when reserves are scarce, even for as short a period as a week or so, it can
generate large spikes in money market rates. And it showed, unfortunately, that banks remain
extremely reluctant to borrow from the discount window, even when that reluctance results in outsized
penalties far above the primary credit rate.
CRA Modernization
Finally, I know the banking community is awaiting final resolution to the discussion about modernizing
the Community Reinvestment Act. Our meeting here today is taking place north of the jagged line that
divides New Jersey between the New York Fed and the Philadelphia Fed. For those of you in the
audience from South Jersey, you know that the discussion about the CRA takes on significant
importance in the Fed’s Third District, and we have hosted one-on-one meetings, roundtable
discussions, and conferences with both banks and community members to better understand their
concerns and gather their insights on updates to the regulation.
The CRA was passed in 1977, and the last significant update to the legislation was done back in 1995. As
regulators, we have heard feedback over the years for the need to update and revise the CRA, and in
2018, we began an interagency process to make significant changes that reflect modern banking and
community needs.
The Philadelphia Fed hosted a conference on CRA modernization in February 2019, and that event
allowed us to listen as various community development experts and financial industry leaders weighed
in on the best approach. We recognize there is value in modernizing the regulation to address the
changing channels that serve customers beyond bank branches, to strengthen the law’s focus on local
communities, and to help bring greater consistency and predictability to CRA ratings.

As you probably know, the FDIC and OCC released their proposals in the fall of 2019. Last week,
Governor Lael Brainard unveiled the Fed’s own approach. The Fed’s proposal is based not only on the
feedback we heard from bankers and communities but also insights from the advanced notice of
proposed rulemaking public comment process and a thorough review of a number of performance
evaluations. In my view, modernizing the CRA will help banks better meet the credit needs in the lowand moderate-income communities they serve.
Because these updates to the CRA will impact your business models, I assume that you have read the
ideas and the metrics of the Fed’s plan, so I won’t go into much detail. But let me make some points
about the Fed’s proposal.
The Fed is proposing the creation of two tests: a retail test to assess a bank’s record of retail loans and
services in its assessment area; and a community development test for large banks, and wholesale and
limited-purpose banks to measure a bank’s performance on community development loans, qualified
investments, and other services. A separate retail test will align with the key focus of the CRA, which is
to ensure that banks are meeting the credit needs of underserved markets. Separate tests also
underscore the importance of the ability to tailor exams to each institution’s asset size, business lines,
and local conditions.
Our proposal also hones in on the importance of metrics and data dashboards, and distilling that data
into helping banks better track and benchmark their CRA performance. We at the Fed like to say we are
“data driven,” and these dashboards will show that data matter not just in monetary policy but in the
work the Fed does in ensuring the U.S. has a robust and equitable financial system.
To reiterate what Governor Brainard said last Wednesday, “it is more important to get reforms right
than to do them quickly.” I couldn’t agree more with that sentiment when it comes to an important
piece of legislation like the CRA. To achieve that goal, regulators at the Fed are having discussions with
the other banking regulators. We are mindful of the business costs that two sets of rules would impose
on banks. And I am hopeful that we can create a consensus going forward.
Congress gave the Federal Reserve a dual mandate to maximize employment and stabilize prices. The
data show that the labor market is doing incredibly well, and I believe the economy is nearing our target
inflation rate of 2 percent. All in all, my outlook for the economy is positive, but let me add that my
outlook will continue to be driven by the data as each report is released throughout 2020.

The data will also determine my view on monetary policy. And policy entails more than interest rates. As
the Fed oversees its balance sheet, we will be mindful of the unexpected, such as happened last
And with that, let me open the floor up to questions.