Former Fed President Harker Says Policy Is Not Restrictive

The headline reports that former Federal Reserve Bank of Philadelphia President Patrick Harker has said current U.S. monetary policy is not restrictive, a view that cuts against the common framing of policy as tight. The transmission mechanism here runs through expectations for the policy rate path: if policy is judged to be near or above neutral rather than clearly restrictive, markets may need to price fewer or later rate cuts, which tends to lift short-dated Treasury yields and flatten the curve. Front-end rate futures and two-year Treasuries are the most directly exposed, since they are the instruments most sensitive to shifts in the expected path of the fed funds rate. Rate-sensitive equities such as housing, small caps, and long-duration growth stocks would also be affected through higher discount rates, while the dollar may firm on relative yield support. The next catalyst to watch is the Core PCE price index release, as a firmer inflation reading would reinforce the argument that policy is not restrictive and sharpen repricing in the front end.

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