Fed policymakers see strong U.S. growth, disagree on rate hikes

PALM BEACH, Fla. (Reuters) - The U.S. economy should grow at a good clip this year, boosted by tax cuts, two Fed officials said on Wednesday, though they disagreed on how close the economy is to overheating and the need for rate hikes this year.

"2018 is going to be a good year," Dallas Federal Reserve Bank President Robert Kaplan said at an American Council of Life Insurers executive roundtable. The U.S. economy is doing "extremely well," Chicago Federal Reserve Bank President Charles Evans told the same group.

Both said the economy would grow more than 2.5 percent this year, fast enough to give a further push downward to unemployment, already at a 17-year-low of 4.1 percent.

But while Kaplan said he is worried about the economy overheating, and is convinced the Fed needs to move "deliberately" this year by raising rates three times, Evans said he supports fewer as "probably appropriate" so as to allow inflation to reach and perhaps temporarily rise above the Fed's 2-percent target.

If inflation does not get to the Fed's 2-percent target by the end of the current economic cycle, Evans warned, the Fed will have a hard time fighting the next recession. And even if the Fed waits until midyear to raise rates, as he has urged, it could still squeeze in three rate hikes if needed.

Their divide reflects the debate that will continue to dominate the Fed as Governor Jerome Powell takes over from Janet Yellen as Fed chair early next month. The majority, like Kaplan, are looking for three rate hikes. A few, like Evans, want less.

Kaplan said the yield on the 10-year Treasury, currently around 2.5 percent, gives the Fed the "operating room" to raise rates three times this year, to 2.25 percent. But, he said, the Fed should be vigilant so as not to invert the yield curve, which historically has been a harbinger of a recession.

Evans said he is not concerned about the shape of the yield curve or about the level of asset valuations.

Neither of them are voting members of the Fed's monetary policy committee this year, but both take part in the Fed's regular policy-setting meetings, the next of which is scheduled in two weeks.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)