MNI EXCLUSIVE: Kaplan: No Fed Move If Virus Damage Transitory

By Evan Ryser

     DALLAS (MNI) - Dallas Fed President Rob Kaplan told MNI he prefers holding

interest rates steady this year if coronavirus disruptions are transitory and

confined to the early months of this year.

     "There's a scenario that this would turn out to be a first and second

quarter event and much of the effect will reverse later in the year," he said in

an interview in his office Tuesday. "We're going to have to continue to assess

how this unfolds and make a judgment about whether this is a transitory event.

If it's a transitory event, I personally would be much more reluctant to think

about changing the stance of monetary policy."

     Kaplan endorsed the FOMC's median view in December that three earlier rate

cuts will keep the U.S. economy growing just above trend, unemployment low and

inflation rising to 2%. Kaplan also said his view of the neutral rate of

interest is at the bottom of the FOMC's range. In other words, on paper he

already has one of the group's strongest views on how low rates must be to keep

the economy humming. 

     "I don't think we should be changing monetary policy for this year, and I

still don't have any moves penciled in," he said. "We are growing at or above

potential in the U.S. Do we need to be more than modestly accommodative? No, I

don't think that." 

     --MUTED INFLATION 

     The Fed has the "latitude" to run the economy "somewhat hotter and be more

patient" in removing accommodation at some point because inflationary forces are

more muted, Kaplan said. 

     Targeting average inflation over a period longer than one year "makes

sense" and could help boost inflation expectations, he said. The Fed should also

look at alternative measures of trend inflation, including the Dallas Trimmed

Mean index and gauges out of the Cleveland and Atlanta Fed banks. 

     "I'm fine lengthening the averaging period. It just shouldn't be a

commitment on what our actions are going to be," he said, noting the Fed's dual

mandate requires it to consider maximum employment as an equally important goal.

     He would not advocate a rate cut upon any move to an average inflation

targeting framework, saying the Fed should not make decisions about the future

by looking in the rear view mirror. 

     --BALANCE SHEET

     Kaplan said the Fed would be well served to be "sensitive" to the costs of

growing its balance sheet and understand that its Treasury bills purchases can

have effects on risk assets and add to financial system excess. 

     Determining how to temper growth in the Fed's securities holdings will be a

major focus for him and his staff in 2020, he said. After rebuilding bank

reserves above the early-September level of USD1.5 trillion, headline balance

sheet growth should moderate "substantially" as bills and term repos run off,

Kaplan said. 

     To that end, the Fed should not buy coupons to avoid sowing further

confusion that its purchases are really quantitative easing, he said. 

     Having provided ample reserves to implement monetary policy effectively,

the Fed would need to address "frictional issues" regarding banks' willingness

to lend reserves, the former Goldman Sachs banker said. 

     A standing repo facility that would readily exchange collateral for

reserves, currently under debate at the FOMC, would address some of these

structural problems and make Treasuries and reserves more fungible, Kaplan said.

     If the drivers of the September repo disruptions were "somewhat less about

the level of reserves and more about the frictional issues, you might be more

receptive to thinking about a standing repo facility, understanding that it

might enable the Fed to run a smaller balance sheet than it would otherwise and

still run an ample reserves regime," he said.

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

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