MNI POLICY: Fed's Kaplan Urges Watch, Wait Before Easing

By Jean Yung

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

Monday urged policymakers to allow events to unfold before lowering interest

rates, adding it's too early to judge whether trade tensions and a global

economic slowdown will cause a material deterioration in the U.S. outlook.

     Easing policy now would "contribute to a build-up of excesses and

imbalances in the economy which may ultimately prove to be difficult and painful

to manage," he warned. 

     "Monetary accommodation is not 'free,'" he said in an online essay. "I

intend to be highly vigilant with regard to the persistence of heightened trade

tensions and indications that slowing global growth is spilling over into a

material deterioration of the economic outlook for the U.S." 

     "In the meantime, I believe it would be wise to take additional time and

allow events to unfold as we consider whether it is appropriate to make changes

to the stance of U.S. monetary policy," he said. 

     The following are other major points from his essay: 

     --Downside risks have risen over the past two months. Tariffs and trade

uncertainty "appear to be having a negative impact on companies' ability to

manage input costs and some chilling influence on their capital spending plans,"

he said. Meanwhile, risks to the global outlook appear to be tilted to the

downside. 

     --The Dallas Fed's Trimmed Mean PCE inflation measure, an alternate measure

of underlying inflation, is running at around 2%, suggesting PCE inflation will

head higher over the next year. Cyclical inflation forces are building, but

structural forces of technology-enabled disruption may be muting inflation. 

     --Kaplan is closely monitoring the shape of the yield curve and would be

concerned about an inversion of either the 3-month-10-year or 1-year-10-year

curves. The current flatness of the curve is indicative of "sluggish

expectations for future growth -- and recent heightening of trade tensions has

likely exacerbated these growth concerns," he said. 

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

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