MNI INTERVIEW: Fed Closer To Slowing Rate Cut Pace - Kaplan
MNI (WASHINGTON) - The Federal Reserve is nearing a slowdown in its pace of interest rate easing, with likely only one or two cuts in 2025, former Dallas Fed President Robert Kaplan told MNI, adding that a rate cut in December is a close call.
"We've got a resilient economy," he said in an interview. "Unless I see clear improvement I think you would probably see from the Fed, and - I think you should see - a pace that is slower, more deliberate."
The U.S. central bank at its next meeting is likely to project fewer rates cuts next year, Kaplan said. "I still think over the next year or two, the Fed can take more action, but I'm more uncertain about the timing, and I would guess in the December SEP you're going to see that uncertainty and that I would expect you're going to see a lower number of projected rate cuts for next year than you saw in the September SEP," he said.
"I would guess it's going to be closer to one or two than to four," said Kaplan. The median FOMC official in September saw four 25 basis point interest rate cuts by the end of 2025 to 3.4%.
GAME TIME DECISION
Kaplan said the Fed has latitude to reduce the Fed funds rate to a range of 4.25% to 4.5% even if headline inflation is sticky around 2.4% or 2.5%, but it should be reluctant to go below that if there is no clear improvement beyond around 2.5% down to 2%. (See: MNI INTERVIEW: Fed To Temper Pace Of Cuts In 2025 - Bullard)
"I don't know if we're going to see that improvement." said Kaplan, now Vice Chairman of Goldman Sachs. "A lot of that is because you're going to see inflation, particularly in the service sector, somewhat sticky. That would give me caution, even if we weren't having a change in structural policies."
An interest rate cut at its December FOMC meeting is a close call. "I would wait right up until game time to make a decision about December. I would want to see one more inflation report. We're going to see one more jobs report, and I would be undecided until I saw those things," the former Dallas Fed president said.
Kaplan said he has no "judgement" on how President-elect Donald Trump's tariff proposals could impact the inflation outlook and cautioned against focusing on just one policy proposal. He is "not ready to make a conclusion" about the outlook.
"This really is a puzzle. I'm going to avoid boring in too unduly on any one piece of the puzzle," he said. "Tariffs are a piece of it, but they're just a piece of it, and so I've been reluctant to come to hard and fast conclusions yet, until I get a better sense of what that puzzle looks like."
WHOLE OF GOVERNMENT
Kaplan is optimistic the government will no longer work at cross-purposes in its battle to secure its 2% inflation target. "We're about to make a transition now to probably an economy that is less government spending-led," he said.
Pointing to the upcoming Trump administration's review of government spending, a regulatory review, changes in tax policy, and the end of the recent surge in immigration, there are a number of structural shifts coming to an economy "that is maybe more organic in terms of growth," he said.
"Going forward you may see a more whole of government approach to economic policy," he said, suggesting the short-term neutral rate has been elevated due to loose fiscal policy. "If you get more normal government spending, I don't know that the neutral rate has actually gone up."