Dallas Fed's Kaplan Calls for Rate Hike in 'Near Future'

--Will Likely Achieve 2% Inflation Target In Medium Term

--Labor Market to be Increasingly Overheated in Months Ahead

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Bank of Dallas President Robert Kaplan

on Monday called for a near-term interest rate increase in light of a tightening

labor market and anticipated rise in cyclical inflation pressures. 

     "I believe it will likely be appropriate, in the near future, to take the

next step in the process of removing monetary accommodation," Kaplan said in an

essay titled "A Balanced Approach to Monetary Policy." 

     "This should be done in the context of an overall strategy of removing

accommodation in a gradual and patient manner. I believe this strategy will

increase the likelihood of sustaining and extending the economic expansion in

the U.S.," he said. 

     Cyclical inflationary pressures have so far been partially offset by

"structural headwinds of technology-enabled disruption" and globalization,

Kaplan said, depressing the overall inflation rate below the Fed's 2% goal for

the past several years. 

     But that balance should shift as the labor market becomes increasingly

overheated in the months ahead, he said. Dallas Fed economists believe the

economy is either at or near the level of maximum sustainable employment right

now and "may well move materially beyond maximum sustainable employment sometime

in 2018," he said. 

     "As labor market conditions continue to tighten, cyclical inflationary

forces should ultimately offset these structural headwinds such that we will

likely achieve our 2 percent target in the medium term," he said. 

     Meanwhile, potential economic and financial imbalances, if allowed to

build, could cause the Fed to fall behind the curve and threaten the

sustainability of the expansion, Kaplan said. 

     The neutral nominal interest rate is materially lower than historical

averages, he added, likely around 2.5%, due to aging demographics and slowing

workforce growth in the U.S. and abroad.

     "As such, I think it is important that, to the extent possible, monetary

policy accommodation be removed in a gradual and patient manner. I would like to

avoid a situation where the FOMC is playing 'catch-up' in raising interest

rates," Kaplan said.  

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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