MNI INTERVIEW: Fed's Harker-2: Sees One Hike This Year

By Jean Yung

     PHILADELPHIA (MNI) - Federal Reserve Bank of Philadelphia President Pat

Harker told MNI he expects the Fed to nudge short-term borrowing rates another

quarter point higher this year and to do the same in 2020 if the U.S. economy

stays on track, but that tepid inflation and ambiguity over the global economic

outlook warrant a patient mindset.

     "The buzzword is patience," Harker said late Wednesday. "We'll see how

things in the next few quarters shake out."

     Harker is the latest senior Fed official to throw his support behind a

wait-and-see approach to further rate moves amid signs of slowing growth and

uncertainty over trade outcomes. Having raised their benchmark rate to a target

range of 2.25% to 2.5% last year with further hikes penciled in, policymakers

signaled a change in tone in January.

     Even before December's hike, Harker said he thought it appropriate to hold

off on further tightening "given the uncertainties." Business contacts in his

district say they are refraining from capital spending for now, he said, with

one banker reporting just this week that customers with approved loans are not

using them.

     "What I hear a lot from people is they don't know where things are going.

Rather than take risk now, they'll wait a bit to see how things play out," he

said.

     --CHUGGING ALONG

     The economy continues to "chug along" as the effects of fiscal stimulus

fade this year, Harker said. Barring unexpected shocks, he expects GDP growth to

decelerate to around 2% this year, close to its longer run level.

     The labor market remains a bright spot, with the economy creating far more

jobs than economists expected and also greatly exceeding levels needed to keep

pace with population growth.

     "It's good to be wrong when more people are getting jobs, and we shouldn't

try to disrupt that process," Harker said.

     But he wants to see inflation to continue to firm before raising rates

again.

     With evidence mounting of a global slowdown and the strength of the dollar,

inflation has lost a bit of momentum recently. "We'll have to see how that

transpires," he said, adding there is "no sign inflation is roaring anytime

soon" in a way that would necessitate more urgent action.

     --SLOW AND STEADY

     Another signal Harker is watching carefully is the yield curve, which has

flirted with an inversion in which short-term yields rise above longer-term

rates. History has shown inverted yield curves often preceded recessions.

     The curve is "quite flat," Harker said. "If we can avoid the risk of it

inverting, we should."

     Policy is likely still slightly accommodative, but "it's possible that we

are at neutral or have a little bit to go," as estimates of the neutral rate are

imprecise, Harker said.

     "My goal is not to overshoot," he said. "Slow and steady is my mantra."

     Harker will rotate into a voting position on the FOMC next year.

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

[TOPICS: MMUFE$,M$U$$$,MT$$$$,MX$$$$]