October 24, 2018 / 2:30 PM / 2 years ago

Fed's Kaplan sees three more interest rate hikes 'likely'

FILE PHOTO - Dallas Federal Reserve Bank President Robert Kaplan poses at a luncheon in El Paso, Texas, U.S., October 2, 2018. REUTERS/Ann Saphir

(Reuters) - The U.S. Federal Reserve should continue raising interest rates at least two but probably three more times before assessing whether further rate hikes to restrain growth are warranted, Dallas Federal Reserve Bank President Robert Kaplan said on Wednesday.

“My base case for 2019 is to gradually and patiently raise the federal funds rate into a range of 2.5 to 2.75 percent or, more likely, into a range of 2.75 to 3 percent,” Kaplan said in an essay outlining policy views.

The Fed last month raised its target range for short-term interest rates to 2 pct to 2.25 percent, a move Kaplan said he supported. Three more rate hikes would lift rates to 2.75 percent to 3 percent; any higher would move monetary policy from a “neutral” stance to a “restrictive” one, he said, slowing economic growth, pushing up on unemployment, and pushing down on inflation.

“I intend to avoid prejudging what, if any, further actions we should take once we get into the range of our best estimate of a neutral stance,” Kaplan said, noting that his estimate of “neutral” is modestly below the 3 percent estimate of most of his peers. “I intend to make that judgment sometime in the spring or summer of 2019 based on the economic outlook at that time.”

The Fed next meets in November, but is expected to defer any further rate increase until December, with most Fed policymakers expecting rates to rise three more times next year.

To Kaplan, the prospect that the fiscal stimulus that has buoyed U.S. growth this year will fade next year makes him hesitate to sign on to more than two 2019 rate hikes without more economic data in hand.

Traders of short-term rate futures, spooked by slowing growth in China and worries about the sustainability of U.S. growth, are betting on even fewer rate hikes.

Writing by Ann Saphir; Editing by Chizu Nomiyama

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