MNI Fed's Harker Sees 2 Hikes In 2018; Soft Infl Problematic

--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$$$]