Fed’s Harker to back rate hike next month

As long as inflation remains on track, three rises could go ahead in 2018

A Federal Reserve official said on Monday he expects to back an interest rate hike next month despite caution over low inflation, as US central bank policy needs to be positioned to deal with future economic shocks.

Philadelphia Fed President Patrick Harker said he has “lightly penciled in” a December rate hike. However, he flagged he had slightly less conviction about the policy decision than he had last month as he “continues to elicit caution” about weak inflation and also about the way in which it is measured.

Harker said he expects the Fed to raise rates three times next year as long as inflation remains on track and the projected tightening could take policy to what he would describe as “a neutral stance”.

Harker, a centrist voter on the Fed’s monetary policy committee this year under an internal rotation, said the Fed must continue normalizing policy as the economy is “more or less at full strength” and there remains “very little slack” in the labor market.

“Removing accommodation is the right next step for a few reasons,” he said.

Price measures have drifted lower below the Fed’s 2 percent target this year, even while unemployment has fallen.

The central bank has raised rates a notch twice in 2017 and is widely expected to do so again next month from its current target range of 1 percent to 1.25 percent.

The Fed will also continue to trim its nearly $4.5 trillion bond portfolio, which Harker said should be clearly communicated in advance and happen in a predictable manner.

Harker said the conditions in the US economy are ripe for further gains in consumer prices.

“We will see unemployment drop below 4 percent probably late 2018 or early 2019, before it starts to come back up,” Harker said.

US President Donald Trump earlier this month chose Federal Reserve Governor Jerome Powell to become the next head of the US central bank when current Fed Chair Janet Yellen’s term expires in February 2018.

Harker said he did not anticipate big changes to monetary policy because of Powell’s appointment.