TOKYO • A Federal Reserve official said yesterday he expects to back an interest rate hike next month despite caution over low-inflation, as the US central bank policy needs to be positioned to deal with future economic shocks.
Philadelphia Fed president Patrick Harker said he has "lightly pencilled in" a December rate hike. But he flagged he had slightly less conviction about the policy decision than he had last month as he "continues to elicit caution" about weak inflation and also about the way in which it is measured.
He said he expects the Fed to raise rates three times next year as long as inflation remains on track, and the projected tightening could take policy to what he would describe as a neutral stance.
Mr Harker, a centrist voter on the Fed's monetary policy committee this year under an internal rotation, said the Fed must continue normalising policy as the economy is "more or less at full strength" and there remains "very little slack" in the labour market.
"Removing accommodation is the right next step for a few reasons," he said in prepared remarks to a Global Interdependence Centre conference in Tokyo. "In the event of another shock to the system, I want our tools to be at their most effective, and in my view, that means reducing our balance sheet."
Price measures have drifted lower below the Fed's 2 per cent target this year even while unemployment has fallen. The central bank has raised rates a notch twice this year and is widely expected to do so again next month from its current target range of 1 per cent to 1.25 per cent.
The Fed will also continue to trim its nearly US$4.5 trillion (S$6.1 trillion) bond portfolio, which Mr Harker said should be clearly communicated in advance and happen in a predictable manner. He said the conditions in the US economy are ripe for further gains in consumer prices, but he wants to make sure he can confirm this in the economic data.
"We will see unemployment drop below 4 per cent, probably late 2018 or early 2019, before it starts to come back up," Mr Harker said.
"That should put pressure on wages and we should see inflation moving back to target. But again, I emphasise the word 'should' because we've been predicting this for a while and it hasn't happened."
US President Donald Trump earlier this month chose Federal Reserver governor Jerome Powell to become the next head of the United States central bank when current Fed chair Janet Yellen's term expires in February next year. Mr Harker said he did not anticipate big changes to monetary policy because of Mr Powell's appointment.