Fed's Harker: Two Rate Increases in 2018 Likely Appropriate -- Update

By Michael S. Derby Features Dow Jones Newswires

Federal Reserve Bank of Philadelphia President Patrick Harker said Friday he is expecting the U.S. central bank to raise rates fewer times in 2018 than it did the year before, adding that officials have time to take stock of the economy before moving again.

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"My own view is that two rate increases are likely to be appropriate for 2018," Mr. Harker told a gathering of the American Economic Association in Philadelphia. After his speech, he told reporters, "for right now, given that we've just moved in December and are continuing to watch the balance sheet normalization, I think we can take some time" before boosting rates again. He noted whatever happens "all depends on how the data comes in."

Mr. Harker was a voting member of the interest rate setting Federal Open Market Committee in 2017, and he supported all of the three rate rises that year that left the central bank's overnight target rate range at 1.25% and 1.50%. He won't be a voter this year. Collectively, officials are considering around three increases for 2018.

Mr. Harker explained in his speech that he believes what lies ahead of the economy looks like a continuation of positive trends. He said he sees growth of just under 2.5%, and noted that when it comes to the job market, there is "very little slack left," with the jobless rate staying low throughout 2018 before increasing "a few tenths of a percentage point" in 2019.

Mr. Harker added that he believes job creation will slow to around 100,000 a month by the end of 2019. But he doesn't see that as problematic: "That's to be expected, and it's more than enough to keep pace with population growth."

On Friday, the government reported job gains of 148,000 in December, with a jobless rate of 4.1%. While slower than past months, "that is still a relatively good number," the official said.

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On the price-pressure front, Mr. Harker said inflation that is below the Fed's 2% target will give way, saying "inflation will run a bit above target in 2019 and come down to target the following year." But he added, "if soft inflation persists, it may pose a significant problem."

Mr. Harker also said he is keeping an eye on the bond market. There, a narrowing in the normally positive difference between short- and long-dated securities is flashing a yellow sign about the outlook. So-called flat yield curves are often viewed as predicting a slower economy in the future, and inversions of the curve, where short-dated securities move above long-dated bonds, are associated with recessions.

Several Fed officials are anxious that Fed rate rises are themselves the primary driver of the yield-curve shift and have warned that if more increases come it could be the central bank itself that causes the next recession.

"Worries so far have been a little inflated," and it appears this so-called flattening of the yield curve is benign, the official said. "I think the removal of accommodation will help somewhat, and I don't think it warrants shouting 'fire' in a crowded theater," he said.

When it comes to recessions and inverted curves, "there is a correlation, but it's not clear the causality is there," he said. He told reporters after the speech that with slow and steady rate rises, "I don't think we should do anything that would precipitate any inversion of the yield curve

Mr. Harker said in his speech that changes in the economy that suggest a generally lower level of interest rates may give the Fed less space to conduct policy. Because of that, he, like some others on the Fed, believe it may be time to look at other ways to conduct monetary policy.

"I should be clear that I'm not pushing for any changes, nor do I have any particular change I would prefer," Mr. Harker said. But, "we need to be seriously considering the various alternatives -- whether it's inflation targeting, price-level targeting, or asymmetric loss functions -- and not fixating on one without serious academic debate about the others."

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

January 05, 2018 13:38 ET (18:38 GMT)