MNI POLICY: Fed's Kaplan Calls for Patience in 1st Half 2019

By Jean Yung

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

Tuesday repeated his call for the Fed to refrain from making interest rate

adjustments until it evaluates how slowing global growth and weakness in U.S.

housing, manufacturing and consumer confidence play out during the first half of

the year. Muted inflationary pressures allows the Fed time to be patient, he

added. 

     "I believe the Fed has the luxury of being patient over the next several

months," Kaplan wrote in an online essay titled "The Value of Patience." 

     "I believe it would be prudent for the Fed to exercise patience and refrain

from taking further action on the federal funds rate until the economic outlook

becomes somewhat clearer. I expect we will get some further clarity during the

first half of 2019." 

     The following are major takeaways from the essay: 

     --Kaplan expressed support for the Fed's more flexible language with regard

to its balance sheet, saying it is "highly appropriate for us to be open to

adjusting the details of our normalization plans based on our ongoing

assessments of the economic outlook and financial conditions." The FOMC is

working on making decisions over the appropriate size and composition of the

balance sheet over the coming months, he said. 

     --Slowing global growth could ultimately spill over into domestic growth

and presents a downside risk to GDP this year. The U.S. housing sector and

manufacturing are also showing signs of weakness. Surveys of consumer sentiment

have also fallen, indicating growing uncertainty. The Dallas Fed projects GDP

growth of 2% this year. 

     --The negative impact of the recent partial government shutdown should

substantially reverse in the coming months. 

     --Financial conditions have tightened since early October, and the Treasury

yield curve is "sending cautionary signals regarding expectations for medium-

and longer-term GDP growth." 

     --He expects inflation to stay muted through 2019. "The structural forces

of automation, technology-enabled disruption and globalization will continue to

offset, at least in part, the cyclical pressures created by a historically tight

labor market."

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

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