By Michael S. Derby 

Most Federal Reserve officials expect to raise short-term interest rates two more times this year, but some are now warning a brightening economic outlook could prompt them to lift borrowing costs even more.

Fed Vice Chairman Stanley Fischer, a close ally of Chairwoman Janet Yellen, reaffirmed the consensus view Tuesday, telling CNBC the central bank's recent projection of two more rate increases this year in addition to the one earlier this month "seems to be about right, that is to say, it's my forecast as well."

Some officials, however, say they see a good chance the economy will perform better than expected -- called upside risk in central-bank jargon -- either because of its own strength or if it gets a boost from new tax, spending and regulatory policies sought by the Trump administration. If so, that could justify more Fed rate increases than currently envisioned to prevent the economy from overheating.

San Francisco Fed President John Williams said Wednesday he still expects just two more rate moves this year, but added, "given my forecast, along with upside risks, I would not rule out more than three increases total for this year."

Chicago Fed President Charles Evans said Wednesday that "for the first time in quite a while, I see more notable upside risks to growth." Speaking at a conference in Frankfurt, he said the environment "reflects both strong economic fundamentals and, possibly, stronger fiscal support over the medium term."

He told reporters after his speech the Fed could lift rates four times this year "if things proceed even better" than currently expected.

Meanwhile, Boston Fed President Eric Rosengren went further, saying Wednesday the Fed should plan on three more rate increases this year, for a total of four in 2017. "The base case would be four tightenings, reflecting the strength of the economy."

He said he wouldn't view such a course as aggressive compared with past Fed efforts to raise rates. He would like to see the Fed move steadily and only hold off if the economy disappoints. "This would still be a fully data-dependent approach, not a preset path," he said.

Mr. Rosengren, once an advocate of keeping rates very low when the economy and inflation were weaker, has more recently favored raising borrowing costs to keep the economy in balance and the expansion humming. He also is worried very low rates could fuel excessive risk-taking in markets, particularly in commercial real estate.

The Fed earlier this month raised its benchmark interest rate to a range between 0.75% and 1% and signaled it expected two more rate rises this year, for a total of three in 2017. The move this month was just the third quarter-percentage-point rate increase since the financial crisis, when the central bank lowered rates to near zero to steady markets and bolster the economy.

Most Fed officials believe they are now at or close to their goals of full employment and low, steady inflation. Unemployment was 4.7% last month, amid robust job growth. Consumer inflation remains short of the Fed's 2% target, but has been rising.

Mr. Williams said the Fed can't wait until inflation hits the target before lifting rates. He said the central bank could tolerate inflation modestly overshooting 2% for a while, but isn't seeking to drive it that high.

One dissenting voice among the officials is Minneapolis Fed President Neel Kashkari, who thinks raising rates now is a mistake given low inflation and uncertainties about the labor market's health. He voted against the rate increase earlier this month and said after the central bank's policy meeting "we are still coming up somewhat short" of the Fed's goals.

Todd Buell contributed to this article.

Write to Michael S. Derby at michael.derby@wsj.com

 

(END) Dow Jones Newswires

March 29, 2017 18:15 ET (22:15 GMT)

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