Fed's Kaplan: Not Ruling Out Third Hike This Year -Press

--Can Be Patient on Next Hike; Watch Data Trends

--Should Announce Balance Sheet Run-Off at Sept Meeting

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

reiterated Thursday that he hasn't ruled out a third rate hike by the end of the

year but that there is no urgency to make the move when inflation has been weak.

     In an interview with CNBC, Kaplan also repeated his view that the Fed

should taper the reinvestment of maturing proceeds in Treasuries and agency

mortgage-backed securities as soon as next month. 

     "I've been vocal saying I think we should begin the process of letting the

balance sheet run off very soon, i.e., as soon as the September meeting announce

that," he said on the sidelines of the Fed's annual symposium in Jackson Hole,

Wyo.  

     The threat of a government shutdown in October if lawmakers don't lift the

statutory U.S. debt limit, which could disrupt global markets, "is something we

got to monitor," Kaplan said, adding, "I'd still be optimistic it isn't going to

happen, so I don't want to prejudge how that's going to unfold." 

     Meanwhile, Kaplan said he wants to see how the economy progresses before

pulling the trigger on the third 25 basis point rate hike the Federal Open

Market Committee projected for the year. Kaplan voted with the vast majority of

committee members in June to increase the target range of the benchmark rate to

1% to 1.25%. 

     "I'm really trying to weigh the conflict between the cyclical factors which

should be creating more inflation, although with a lag, and some of these

structural factors like globalization, technological disruption that are muting

pricing power of businesses," Kaplan said. 

     "I'm not saying that we won't act by the end of the year. I think we have

the ability to be patient here and see more information and see how these forces

unfold before making a judgment." 

     The problem is weak inflation even as the unemployment rate has fallen to

decade-plus lows, Kaplan said. A debate is taking place at the Fed over whether

its economic models are still effective and that's a healthy process, he said. 

     Another factor is a drop in the so-called neutral rate over the past decade

to "closer to 2% than 3%" from as high as 5%, Kaplan said. 

     "If we're at 1% to 1.25%, it means we're still accommodative, but we're

probably not as accommodative as people think, and we might not have as far to

go to get to neutral as people have thought," he said. 

     Kaplan said he still sees GDP growing at more than 2% this year, though

regulatory review and tax reform could spur growth. He still hasn't factored in

any potential policies under discussion in Congress because he doesn't know

which will be implemented. 

     On the other hand, President Donald Trump's immigration and trade policies

could hurt growth by putting a lid on workforce growth and eroding U.S.

competitiveness, Kaplan said. 

     If renegotiations of the North American Free Trade Agreement undermines the

trade relationship with Mexico, it would hurt firms' supplies chains and lead to

job losses, he said. 

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

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