May 9, 2017 / 9:38 PM / 3 months ago

Fed's Kaplan sees more U.S. rate hikes amid 'muted' inflation

DALLAS (Reuters) - Dallas Federal Reserve Bank President Robert Kaplan on Tuesday said he continues to believe U.S. rate hikes should be "gradual and patient," in part because wages and prices are rising more slowly than might have been expected with an economy so close to full employment.

"I still believe the base case for removal of accommodation is three times this year, but I’m very cognizant of the fact that inflation pressures have been more muted," Kaplan told reporters after an event at the Bush Institute in Dallas. "There’s no question that the path toward 2-percent inflation has been slow and uneven."

The Fed raised interest rates in March and officials signaled then that they expect to raise them two more times this year, a slow pace by historical standards but faster than the once-per-year pace of 2015 and 2016. In sticking to that view Tuesday, Kaplan signaled he was not ruling out a faster or slower pace should conditions warrant.

"It could easily be the case that the economy will unfold in a stronger way than I expect and we could do more," Kaplan said, adding that it could also grow more slowly, prompting the Fed to slow its rate increases. "I think the risks actually are pretty balanced."

Kaplan made clear that part of the reason for raising rates and, later on, trimming the Fed's balance sheet is to better position the Fed to fight a future recession or shock when it comes, but that he was in no mood to rush.

"The fact that you would like to have more balance sheet to work with or other tools shouldn't cause you to take actions than what are appropriate for the path of monetary policy," Kaplan said. "On the other hand you'd like to be mindful of the fact you want to take the opportunities to remove accommodation and begin to allow the balance sheet runoff; to the extent we make more progress doing it will give us more, I would hope it would give us more tools in the future."

Reporting by Ann Saphir; editing by Diane Craft

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