MNI POLICY: Fed's Kaplan Sees 3 Hikes Through End-2019

By Jean Yung

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

Wednesday he supports three interest rate increases through the end of 2019 to

take rates to a neutral setting before evaluating the next steps, a slightly

more dovish view than the median projection among his colleagues.

     "My base case for 2019 is to gradually and patiently raise the federal

funds rate into a range of 2.5 to 2.75 percent or, more likely, into a range of

2.75 to 3 percent," he wrote in an essay titled "The Neutral Rate of Interest."

     The rate-setting Federal Open Market Committee last month lifted the Fed's

benchmark rate into a range of 2% to 2.25%. Most officials support one more rate

hike this year and the median outlook for next year calls for three more

increases.

     The minutes of the meeting later revealed majority support for taking rates

into modestly restrictive territory, in other words, slightly above estimates of

their neutral setting at around 3%.

     However, Kaplan and his colleague Raphael Bostic, chief of the Atlanta Fed,

have argued it would be appropriate to reevaluate data and the path forward

around neutral rather than pushing past it.

     "I intend to avoid prejudging what, if any, further actions we should take

once we get into the range of our best estimate of a neutral stance," Kaplan

said. "I intend to make that judgment sometime in the spring or summer of 2019

based on the economic outlook at that time."

     Kaplan noted that his own estimate of the longer-run neutral rate is

"modestly below" the median of the FOMC.

     While the short-run neutral rate might very well be higher than the longer

run, due to the fiscal stimulus which materially but temporarily increases

near-term GDP, Kaplan said he prefers to focus on the longer-run estimate in

making policy.

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

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