Regional banks see more 2018 Fed rate hikes if outlook holds

Bloomberg

Two regional Federal Reserve bank presidents said they favour raising interest rates twice more this year following a hike this week, but were open to shifting their views if the
outlook warranted a different policy approach.
“My forecast had three moves for this year,’’ Atlanta Fed President Raphael Bostic, who votes this year on monetary policy, told reporters after a speech in Knoxville, Tennessee. “To the extent growth accelerates more than our models predict, then four could be prudent. If it comes in less than our models predict, then two could be prudent.”
His comments were echoed by Dallas Fed chief Robert Kaplan, who told reporters in Austin, Texas, that “my base case continues to be three for the year, and having said that I am also open minded and we’ll see how the year unfolds. It’s certainly possible that that view will get amended.”
The Federal Open Market Committee, meeting under Chairman Jerome Powell for the first time, raised interest rates for the sixth time since it began tightening monetary policy
in December 2015, lifting the benchmark policy target range to 1.5 percent to 1.75 percent.
A third regional Fed president, Minneapolis’s Neel Kashkari, told an audience in New York that he supported the move this week to show continuity between the Powell Fed and his predecessor, Janet Yellen, though he did not think the economic data warranted a rate increase at this time.
The committee also penciled in two additional rate hikes for 2018, according to officials’ median forecast, and predicted a steeper path of increases in 2019 and 2020 because of an improving economic outlook.
Fed officials are studying soft first-quarter economic reports against a backdrop of potential stimulus following tax cuts passed by Republicans in December, which could
lift growth by spurring spending and investment.
Financial conditions have tightened since late January as investors look for signs that the central bank might raise rates at a faster pace, while forecasters predict stronger US growth and tight labour markets. On the other hand, inflation rose 1.5 percent in the 12 months through January and has been under the Fed’s 2 percent goal for most of the last six years.
“Inflation is not showing signs of spiking,’’ Bostic said. “Wages are not showing signs of spiking in a dramatic way.’’ The Atlanta Fed leader said he looks for borrowing costs to rise over time to a neutral rate — which neither spurs nor holds back growth — of about 2.25 percent to 2.75 percent.
That is less than the FOMC’s median estimate of a long-term rate of around 2.9 percent. While most policy makers see the likelihood of overshooting that rate in 2020 — the median estimate shows 3.4 percent — Bostic said he would be patient before moving too fast.
“Once we get to neutral, we should step back and take a look to see how the economy is performing,’’ he said. “If there are signs the economy is overheating, then we should act to tighten a little bit. But if not, I would be comfortable staying at neutral until we see those signs. That is at least a year away from now and
possibly more.’’
US stocks fell sharply this week on fears of a trade war after President Donald Trump announced plans to slap tariffs on $50 billion in Chinese goods. The move followed Trump administration tariffs on steel and aluminum imports, though a number of nations have since won exclusions.
Kaplan said that open global trade was in the US national interest, but played down the risks of the situation escalating. “My guess is this has a few more innings to run, to see how this ultimately unfolds, whether these are negotiating tactics” or sustained policy.
Kashkari said that “If there was a trade war and a major shock to global confidence then I think you would see that manifest itself not only in equity prices” but also in bond spreads and other financial market instruments.