MNI POLICY: Fed's Kaplan: Closely Monitoring Covid-19 Impact

By Jean Yung

     WASHINGTON (MNI) - Dallas Fed President Rob Kaplan said benchmark

short-term rates are "roughly appropriate" for an economy growing at a solid

pace and warned the coronavirus outbreak represents a downside risk.

     The virus poses "meaningful risk" to global crude oil demand as Chinese

consumption made up 57% of consumption growth last year, he said. An expected

first-quarter consumption decline would be the first drop from a year earlier

since the Great Recession, Kaplan said in an essay published Monday. 

     Global growth is expected to stabilize this year following the calming of

trade uncertainties and greater clarity over Brexit. The strength of the U.S.

consumer, underpinned by falling household debt and a low unemployment rate,

should lead to "solid growth" in the 2% to 2.25% range this year, Kaplan said. 

     "Based on my base-case outlook for the U.S. economy, the current setting of

the federal funds rate at 1.5 to 1.75 percent is roughly appropriate," Kaplan

said. 

     "I will be closely monitoring a variety of economic developments and, in

particular, continuing to assess how the coronavirus ultimately will impact the

U.S. and global economies." 

     --BALANCE SHEET 

     Kaplan expects the Fed to taper its Treasury bill purchases in the second

quarter and its active repo operations to decline gradually over the first half,

culminating in "significant" moderation of balance sheet growth. 

     "It is my hope and expectation that, as reserves in the banking system meet

or exceed ample levels of at least $1.5 trillion, the Fed balance sheet will

expand only gradually to reflect trend growth in the demand for currency and

other Federal Reserve liabilities," he said. 

     Kaplan remains open to strategies helping the Fed limit growth of its

balance sheet while keeping ample reserves in the system, and voiced his support

for a review of supervisory and regulatory policies to put bills and reserves on

"more equal footing" in terms of banks' liquidity management.

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

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