MNI: Fed's Kaplan: Keeping Open Mind on Hike Timing, Inflation

--Still Diagnosing Why Infl Has Lagged; Structural Forces Play Big Part

--May Be Wise to Take Another Tightening Step to Manage Risks

By Jean Yung

     BOSTON (MNI) - Dallas Federal Reserve Bank President Robert Kaplan said

Friday he intends to keep an open mind ahead of upcoming Fed meetings on the

timing of the next rate hike as conflicting forces in the economy continue to

hold down inflation but that taking the next tightening step may be wise from a

risk-management perspective. 

     On the one hand, cyclical inflationary pressures are building as the labor

market tightens. But those pressures are offset by structural shifts in

technology-enabled disruption and globalization, Kaplan said. 

     "I'm going to keep an open mind, but I'm watching these conflicting forces

and I'm also watching business trends generally," Kaplan, who has a vote on

rates this year, told reporters after giving a talk at a CFA Institute

conference in Boston. 

     "It doesn't mean cyclical pressures aren't building. I think they are," he

said. But, "I think some patience here in watching this unfold makes sense. I

think we have some time, an ability to be patient. We have some time between now

and upcoming meetings so I plan to take it."

     Kaplan said he's still "at diagnosis" stage over why inflation has been

lagging and declined to comment on Friday's CPI report that showed core

inflation rising just 1.7% over the year. He said he believes tech-enabled

disruption plays a big part and will likely continue to affect the economy for a

long time. 

     That said, as cyclical pressure on inflation builds, "From a risk

management point of view, it might be wise to take another step in removing

accommodation," with the understanding that the fed funds rate remains over 100

basis points below his estimate of the neutral rate, which is close to 2.5%,

Kaplan said. 

     He said he's keeping a close eye on excessive debt build-up as a result of

easy financial conditions. 

     "Even if we take the next step we'll be accommodative. I'll come to a final

conclusion on it certainly before upcoming meetings," he said. 

     Kaplan separately commented on the Trump administration's ongoing search

for the next Fed chair, saying the best candidate should be "a formidable

analyst of the economy in their own right" and "have to be good at mobilizing

the group to forge a consensus." 

     That process by which different views are debated "serves the Fed and the

country well," Kaplan said. 

     Proposed legislation in Congress that would hold the Fed to a formula for

setting policy would not serve those purposes, Kaplan said. He and his team take

into account rule recommendations and it's a healthy process to look at why

policy might deviate. 

     But "I think that we'd be best served by being not overly prescriptive," he

said. "I fear that rules would be unduly rigid and create some unforeseen

consequences." 

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

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