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WASHINGTON (Reuters) - Dallas Federal Reserve President Robert Kaplan said on Thursday that two more interest rate hikes this year remains possible but that the U.S. central bank has the flexibility to wait and see how the economy unfolds.
"Three rate increases this year...is still a good baseline. If the economy develops a little more slowly, then we can do less than that and if the economy is a little stronger, we can do more than that," Kaplan said in an interview with Bloomberg TV.
The Fed has already raised its benchmark interest rate once this year, by a quarter percentage point at its last policy meeting in March.
In deciding when to support future rate rises, the Dallas Fed chief noted he was closely watching inflation and that even though it continued to slowly move up, excess capacity in China and technology-enabled disruption of business were both exerting downward pressure.
The central bank has raised interest rates at two of its last three meetings and has already partly turned its attention to tackling the $4.5 trillion balance sheet it built up to help spur the economy in the wake of the financial crisis.
Kaplan said that he thought this year could be appropriate to take action to reduce the size of the Fed's portfolio.
"As soon as later this year or maybe early next year, we should begin the process of letting the balance sheet roll off," he said, adding that any plan should be made public at least a couple of months in advance.
On the size of the reduction, he said the Fed doesn't have an "exact fix" but "it's going to be bigger than the $800 billion we used to run."
Reporting by Lindsay Dunsmuir; Editing by Chizu Nomiyama