MNI POLICY: Fed's Harker Sees One Rate Hike This Year

By Jean Yung

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

Harker said Monday he continues to pencil in one interest rate increase this

year and possibly another in 2020, citing that transitory factors likely

contributed to recent softness in inflation. 

     While he's watching inflation carefully, he has yet to revise down his

medium term forecast from slightly above 2%, "because I suspect some of the

recent weakness is transitory," he said.

     "If any component of the outlook were to affect my view on the appropriate

path of monetary policy, it would be inflation. However, we're not there yet,

and it would take more data to convince me. I therefore continue to see one

increase at most this year; possibly one, at most, next," he said in remarks

prepared for a financial conference in Philadelphia. 

     Harker expects the unemployment rate to slide a tad further to a low of

3.5% before rebounding and growth to be a little above 2% this year, and added

that the initial reading on first quarter GDP growth was a "pleasant surprise." 

     On the Fed's balance sheet normalization plan, Harker said bank reserves

will continue to shrink very gradually after Treasury runoffs end in September

while officials look for signs that they have reached the "efficient and

effective" level of reserves needed to implement policy. At that point, the Fed

will resume asset purchases to maintain that level.   

     "We intend to walk toward the "efficient and effective" level, rather than

charging at full speed," he said. 

     Officials still have to sort out the maturity profile of their portfolio as

they plan how to distribute reinvestments and asset purchases and will continue

to debate the issue. 

     Moving to a shorter duration portfolio offers officials the flexibility to

use balance sheet policy in the event that rates cannot provide any more

accommodation, Harker said. 

     He does not vote on policy this year. 

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

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