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--Low R-Star Environment Means Harder to Hit Inflation Target
--Need Academic Discussion on Alternative Policy Frameworks
By Jean Yung
     PHILADELPHIA (MNI) - Federal Reserve Bank of Philadelphia President Patrick
Harker on Friday called for two interest rate increases this year, saying he is
in "monitoring mode" on below-target inflation and the shape of the yield curve.
     That puts him in the group of 6 Federal Open Market Committee members who
believe fewer than three hikes are appropriate for the year. Another six
officials, including the median forecast, called for three, while four other
officials predicted more than three for the year. 
     Despite solid economic growth, inflation continues to run below the Fed's
2% symmetric target, with the personal consumption expenditure price index
rising 1.8% in November and the core PCE price index gaining just 1.5%. 
     "If soft inflation persists, it may pose a significant problem," Harker
said in remarks prepared for a panel at the annual meeting of the American
Economic Association. "For that reason, my own view is that two rate increases
are likely to be appropriate for 2018."
     He still expects inflation to run a bit above target in 2019 and come down
to 2% the following year, but added, "I am more hesitant in this view than I am
on economic activity." 
     If recent research suggesting that natural rates of interest are lower than
historical norms is correct, "it may be difficult to meet our inflation
objective," which could in turn feed a vicious cycle in which inflation
expectations begin to trend down, reinforcing lower than desired inflation. 
     That "new normal" for monetary policy suggests it may be time to reevaluate
the way the Fed conducts policy, Harker said. All the various alternatives
proposed so far -- inflation targeting, price-level targeting, and asymmetric
loss functions -- deserve serious consideration, he said. 
     "I should be clear that I'm not pushing for any changes, nor do I have any
particular change I would prefer," he said. "But it is a question for the
profession itself, and we do need people thinking about this." 
     Harker, who does not vote on interest rate settings this year, said he
thinks there is "very little slack" left in the labor market and he expects the
unemployment rate, currently at 4.1%. to stay low this year and rebound sometime
later. 
     "Job creation will slow and should dip to around 100,000 a month by the end
of 2019, but that's to be expected, and it's more than enough to keep pace with
population growth," he said. U.S. employers added an average of 171,000 payrolls
a month in 2017. 
     He is also keeping an eye on the flattening of the yield curve. Worries
over the yield curve so far have been "a little inflated," he said. 
     "Overall, I'm keeping the same watchful eye that I am on a lot of other
developments, but I think the removal of accommodation will help somewhat, and I
don't think it warrants shouting 'fire' in a crowded theater," he said. 
--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com
[TOPICS: MMUFE$,M$U$$$]