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Fed's Quarles pushes for gradual rate hikes, review of crisis-era bank regulations

  • Fed Governor Randal Quarles, a voting member of the FOMC, says inflation running a little below target shouldn't stand in the way of interest rate increases.
  • Markets expect the central bank to approve three quarter-point increases this year and give a 30 percent chance for a fourth.
  • In addition to monetary policy, Quarles says now would be a time to review the banking regulations put in place in response to the 2008 financial crisis.
Randal Quarles
Jb Reed | Bloomberg | Getty Images
Randal Quarles

Fed Governor Randal Quarles said Thursday that inflation running a little below target shouldn't stand in the way of rate increases.

With the central bank expected to hike at least three times this year, the newest Fed member said he supports a continual gradual pace of increases. The Fed shoots for a 2 percent inflation rate that it believes represents an equilibrium growth level.

The personal consumption expenditures index, the Fed's preferred inflation gauge, ran at 1.7 percent in 2017 including food and energy and 1.5 percent otherwise.

"After assessing the recent data, my take is that the current shortfall in inflation from target as most likely due to transitory factors that will fade through 2018, pushing inflation back up to target," Quarles said at the 26th International Financial Symposium sponsored by the Institute for International Monetary Affairs.

"Suffice to say, a deviation from our target of a few tenths of 1 percentage point, especially one I expect to fade, does not cause me great concern," he added.

The event was held in Tokyo, and Quarles, a voting member of the policymaking Federal Open Market Committee, spoke in the afternoon Thursday local time.

His comments came at time when the market expects the next rate increase to come at the Fed's March meeting. Minutes released Wednesday of the January meeting indicated that officials are optimistic about economic growth and expect that inflation will continue to progress toward the 2 percent target.

Markets have been on edge lately over whether the Fed might decide that the economy is running too hot and in need of more aggressive monetary policy tightening. Traders in the fed funds futures market current have three rate increases pretty well priced in, though there's a 30 percent chance of a fourth hike, according to the CME's FedWatch tracking tool.

Quarles emphasized that the Fed should be patient and should condition future increases on continued progress in inflation and employment.

"Against this economic backdrop, with a strong labor market and likely only temporary softness in inflation, I view it as appropriate that monetary policy should continue to be gradually normalized," he said.

In addition to discussing monetary policy, Quarles mentioned bank regulation as part of a speech commemorating the 10th anniversary of the financial crisis that paralyzed the world economy in 2008.

His comments indicated a desire to review the effectiveness of regulations put in place after the crisis. The Fed, other regulators and Congress clamped down on banks, requiring higher capital levels and less risk-taking.

"At this point, we have completed the bulk of the work of postcrisis regulation," Quarles said. "As such, now is an eminently natural and expected time to step back and assess those efforts. It is our responsibility to ensure that they are working as intended, and — given the breadth and complexity of this new body of regulation — it is inevitable that we will be able to improve them, especially with the benefit of experience and hindsight."

Quarles is President Donald Trump's first successful appointment to the Fed board of governors, which still has four vacancies. Trump also nominated Carnegie Mellon economist Marvin Goodfriend, but he has yet to be confirmed.

WATCH: Market experts weigh in on the Fed's future.