Fed's Harker still sees one rate hike 'at most' this year

[March 25, 2019]   (Reuters) - One interest rate hike this year "at most" still makes sense given strong U.S. economic conditions, a Federal Reserve official said on Monday, despite risks that keep him in "wait-and-see mode" for now.

Strong economic growth and a positive outlook could still keep a rate hike on the table this year and another in 2020, Federal Reserve Bank of Philadelphia President Patrick Harker said in London. He also said the Fed will not be making "any drastic change in the near future" to the kinds of bonds it keeps on its $4 trillion balance sheet.

Harker's colleagues on the central bank's policymaking committee on Wednesday abandoned projections for any interest rate hikes this year, citing signs of an economic slowdown.

Harker participates in Fed policy discussions but does not have a vote until next year. Markets regard the Fed's next likely move as a rate cut.

Inflation is "edging slightly downward" and business confidence has declined, Harker said, factors causing him to see risks tilting "very slightly to the downside" and supporting the Fed's pause after nine hikes since 2015 have brought the Fed's target rate to between 2.25 and 2.5 percent.

"I continue to be in wait-and-see mode," Harker said in a speech prepared for delivery to the Official Monetary and Financial Institutions Forum. "My current view is that, at most, one rate hike this year, and one in 2020, is appropriate, and my stance will be guided by data as they come in and events as they unfold."

NEUTRALITY, FLEXIBILITY FOR FED BALANCE SHEET

Harker also offered an update on the Fed's balance sheet. On Wednesday the Fed said it would halt the steady decline of its bond holdings in September but left open questions of exactly what bonds the Fed would like to keep in the long run and how quickly it would try to get there.

Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo

The Fed will not go back to holding primarily Treasuries "for some time," according to Harker. The Fed bought mortgage-backed securities in an unusual step after the financial crisis to help stabilize the housing market and economy.

Yet over time Harker said the central bank should seek to once again hold bonds that would have a neutral effect and give the central bank flexibility to again use bond buying if rates fall near zero and the economy needs stimulus.

To achieve that, Harker said the Fed should avoid cornering the market on any particular security or auction. The Fed could hold bonds of maturities of the same proportion as the broader Treasuries market, he said, or the central bank could favor holding bonds due in a year or less to give them more flexibility to buy longer-term bonds to provide stimulus.

(Reporting by Trevor Hunnicutt in New York; Editing by Chris Reese)

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