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UPDATE 1-Fed's Kaplan sees two rate hikes in 2016, Brexit a factor

(Repeats to widen distribution, adds comments on rates, growth, unemployment)

HOUSTON, May 25 (Reuters) - Dallas Federal Reserve Bank President Robert Kaplan on Wednesday said the Fed should raise U.S. interest rates two times this year, though uncertainty over whether the British will opt to leave the European Union could delay any move until July or later.

“In the near future, I’d advocate taking the step” of raising the Fed’s benchmark policy rate, Kaplan said in Houston, adding that it’s “very possible” the outcome of the U.K.’s so-called Brexit referendum will not be clear when the Fed meets in June, about a week before the British vote.

“If economic data keeps going the way it is, I’ve said I will advocate for an increase in the near future,” Kaplan told reporters after a public appearance here. “That may not be June or July, My approach is take one meeting at a time.”

Kaplan added that his economic outlook, as formulated and submitted to his colleagues in March, is “consistent” with two rate hikes this year. That view puts him in agreement with the majority of his fellow policymakers.

The U.S. labor market is heading toward full employment, with unemployment likely to fall below its current 5-percent level, he said.

Kaplan also suggested he sees room for fiscal policy to boost the U.S. economy, given the limitations of monetary policy, and called for “a little bit” looser regulation for small banks.

“We’ve been suffocating our small banks, which is hurting local business formation,” Kaplan said in Houston. “We need to look at the limits of monetary policy. Monetary policy is not the be-all and end-all, but we’ve not had a lot of fiscal policy in the last seven, eight years.” (Reporting by Erwin Seba; Writing by Ann Saphir; Editing by Meredith Mazzilli and Chizu Nomiyama)