With good progress toward the Federal Reserve's twin goals of stable prices and full employment, the U.S. central bank ought to keep raising interest rates and begin trimming its giant balance sheet before year's end, Dallas Fed President Robert Kaplan said on Monday.
But in a caveat that could loom large as the Fed heads towards its mid-June meeting, Kaplan suggested he is not yet ready to declare victory on the inflation front, particularly in view of weaker inflation readings in both March and April.
"I am cognizant that progress toward our 2 percent inflation goal has been slow and, at times, uneven," Kaplan said in a paper released by the bank on Monday that repeats many of his recent comments on the outlook for the economy and policy. "I intend to be patient in critically assessing upcoming data to evaluate whether we are continuing to make progress in reaching our inflation objective."
Kaplan, a voter this year on the Fed's policy-setting panel, is often a good barometer of the Fed leadership's views on monetary policy. With inflation still not quite at the Fed's 2-percent goal, some policymakers are wary of continuing to raise rates and risk stopping that progress in its tracks.
Kaplan reiterated his view that leaving rates low for too long is risky, and that unemployment, at 4.4 percent in April, is very close to his view of full employment. Jobs growth, he forecast, is likely to slow as slack declines in the labor market.
"I continue to believe that three rate increases for 2017, including the March increase, is an appropriate baseline case for the near-term path of the federal funds rate," Kaplan said.
The process should be "gradual and patient" and the pace could be faster or slower if economic conditions improve or worsen more than expected, he said.
Meanwhile, the Fed's $4.5 trillion balance sheet, which is pushing down on long-term rates, should be allowed to shrink gradually, starting, he said, "sometime later this year."
(Reporting by Ann Saphir; Editing by Chizu Nomiyama)