The U.S. central bank should only raise interest rates once this year “at most” given risks to the economic outlook including Britain’s departure from the European Union, said Federal Reserve Bank of Philadelphia President Patrick Harker.
“The potential risks tilt very slightly to the downside, but I emphasize the word ‘slight.’ I still see the outlook as positive, and the economy continues to grow,” he told an audience in London on Monday, according to a text of his prepared remarks. “My current view is that, at most, one rate hike this year, and one in 2020, is appropriate.”
Fed officials last week lowered estimates for U.S. growth this year with their median projection signaling no rate increases in 2019 and just one in 2020. That completed a pivot that began in January, when officials pledged they would be patient in deciding their next policy move. Investors now see a higher likelihood that the next Fed rate move will be a cut than a hike, based on pricing in interest rates futures.
For GDP, “I see growth a bit above 2% this year, returning to trend of around 2% sometime in 2020,” Harker said. An inflation outlook that “if anything” is edging slightly downward also suggests a “wait-and-see mode,” he said.
Harker said uncertainty was dampening the outlook for business investment although U.S. household spending “continues at a strong, sustained pace,” noting slower global growth and trade disputes.
“Of course, I could not be in London without noting that, yes, Brexit is indeed a part of that landscape,” he said.
The Philadelphia Fed chief also devoted part of his speech to discussing the future composition of the central bank’s balance sheet, which it has been slowly shrinking by allowing its bond holdings to mature.
While the composition won’t change much in the near future, Harker talked about the benefits of greater policy flexibility if the Fed shortened the duration of its asset portfolio, for example by increasing its holdings of Treasuries with a maturity of a year or less.
“The shorter the duration of the portfolio, the larger the flow of maturing proceeds at any given time. That flow can be redirected, allowing for a swift change in the composition without expanding the balance sheet or having to sell assets outright,” he said. This approach, Harker added, was the basis of the Fed’s maturity extension program in 2011, also known as “Operation Twist.”
