MNI POLICY: Fed's Kaplan Keeps Open Mind On Policy Rate

By Evan Ryser

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

indicated he is open to rate cuts as global growth decelerates and weakness in

U.S. manufacturing and business investment intensifies.

     "I intend to avoid being rigid or predetermined from here, and plan to

remain highly vigilant and keep an open mind as to whether further action on the

federal funds rate is appropriate," Kaplan said in an essay on structural

factors impacting the economy.

     While Kaplan supported adjustments to lower the policy rate in July and

September, he acknowledged concerns over "potential excesses and imbalances that

can be created as a result of excessive accommodation."

     The economy "is at or past the level of full employment," whether measured

by September jobs growth of 136,000, the broader measure known as U-6, or from

Dallas Fed surveys of employers, Kaplan said.

     While inflation has been below target as measured by headline PCE, the

Dallas Trimmed Mean PCE is currently at 2% on a 12-month basis, he said.

     "Dallas Fed research suggests that the trimmed mean measure of inflation is

a good indicator of future inflation trends. On that basis, it is our

expectation that the headline PCE inflation rate will reach the Federal

Reserve's 2% target over the medium term."

     While recent economic slowing was expected as the effects of fiscal

stimulus diminished, Kaplan said, "some of the slowing is also due to heightened

trade tensions" contributing to manufacturing and business direct investment

weakness.

     --CONSUMER CONFIDENCE

     A global slowdown "could spread to the broader U.S. economy, ultimately

impacting consumer confidence and spending," Kaplan said.

     Consumer confidence is "fragile," and consumer spending offers little

insight into future prospects for the economy as just one or two months of weak

jobs reports could slow spending habits, he noted.

     "I've repeatedly said that if we wait to see weakness in the consumer

before taking action, we will have likely waited too long. From a

risk-management point of view, that is a mistake I prefer not to make."

     Kaplan said he "intend[s] to continue to carefully monitor the yield curve

and gauge the ongoing implications of negative gaps between the federal funds

rate and yields on longer-dated Treasury securities."

     Kaplan said the Treasury curve reflects slowing global growth and added

that the high policy rate relative to market-determined rates "are a reality

check that suggests the setting of the federal funds rate was tighter than

appropriate prior to the July and September FOMC meetings," Kaplan said.

     Offering few details, Kaplan emphasized support for "more-permanent steps

to ensure the proper functioning of repo and other short-term funding markets.

     "I am also supportive of taking steps to adjust the size of the Federal

Reserve's balance sheet in order to help achieve our objective of implementing

policy in an ample-reserves regime," Kaplan said.

     Chairman Jerome Powell on Tuesday said in a speech in Denver the Fed will

start expanding its balance sheet again "soon" by purchasing Treasury bills.

Spikes in overnight lending markets in mid-September helped spur the Fed into

action.

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

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