MNI Fed's Harker: In Cautious Stance; Want to See Higher Infl

--FOMC Can Take Some Time To See How Data Plays Out

--Want to See Inflation Reach, Stay Above 2% For a While

--No Sign Inflation Accelerating Rapidly

By Jean Yung

     PHILADELPHIA (MNI) - Philadelphia Federal Reserve Bank President Patrick

Harker on Friday told reporters he prefers a "slow and steady" approach to

raising interest rates in light of considerable uncertainty over sluggish

inflation and a flattening yield curve. 

     "At this point I don't think we should do anything to precipitate the

inversion of the yield curve or other things," he said on the sidelines of the

American Economic Association conference. "That's why I want to be slow and

steady with additional rate increases, which is slowly removing accommodation

along with normalization of the balance sheet." 

     He said in remarks prepared for the conference that he has penciled in two

rate hikes for the year, a slightly more dovish expectation than he had late

last year. He declined to predict whether March might be an appropriate time for

the next move, saying, "Given that we just moved in December and we continue to

watch the balance sheet normalization, I think we can take some time." 

     --HITTING INFLATION TARGET

     The fact that policymakers are not seeing an acceleration of inflation in

any significant way means "we have some time," he repeated. Harker does not vote

on rates this year. 

     The Fed has said its 2% inflation target is symmetric, and there are some

signs that it is firming, Harker said. However, policymakers don't fully

understand why progress has been so slow when the labor market is at full

employment and economic growth momentum looks solid. 

     "It would be helpful if we were able to get inflation not just at 2% but

above it for a while," Harker said.  

     The $1.5 trillion tax cuts Congress passed in December is not expected to

have a large impact on growth, perhaps adding only 10 to 20 basis points to GDP

growth per year. "The jury is still out" on how firms will use their tax

savings, whether to issue dividends, buy back stock or step up investments. 

     As for whether companies would raise wages, Harker said he was "skeptical."

From his experience sitting on corporate boards, firms will only raise wages

"because I have to and not because I want to," he said. And so far, anecdotal

reports from business contacts have painted a picture of firms trying to do

everything but raise wages, Harker said. 

     "I continue to expect that we'll see some wage pressure but we just simply

haven't seen it, so that's why I'm in a cautious stance right now." 

     --NEW POLICY FRAMEWORK

     He admitted he among other policymakers have been "struggling" with

understanding how monetary policy and the economy are changing in light of the

uncertainty surrounding recent inflation and data trends. 

     That's "not a bad thing" but argues for exploring new ideas about monetary

policy frameworks such as inflation targeting, price level targeting or

asymmetric loss functions, a point he has made several times to his Fed

colleagues, including incoming Fed President Jay Powell, Harker said. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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