MNI POLICY: Kaplan Says Fed Should Stay Put

By Evan Ryser

     NEW YORK (MNI) - Dallas Federal Reserve President Robert Kaplan said

Tuesday he is comfortable with the current level of the policy rate going into

2020.

     Kaplan, who will be a voting FOMC member in 2020, said: "The right thing to

do for us is to stay right where we are, unless something changes materially on

the upside or the downside."

     Kaplan said risks are now more balanced, whereas earlier in the year they

were tilted to the downside. Material changes to get the Fed to move, Kaplan

said, could involve GDP growth, inflation, or the path of the unemployment rate.

     In his first public remarks since the Fed's decision to hold rates steady

last week in a band of 1.50% to 1.75%, Kaplan said he expected the U.S. economy

to grow at 2% in 2020, with an unemployment rate "around 3.5%."

     "We will have some firming in inflation, but gradually toward 2%."

     Speaking at the Council on Foreign Relation in New York City, Kaplan said

labor markets are at or near full employment but wage pressure has remained

muted due to technology.

     "There has been a dramatic change in the way business are run," Kaplan

said. "It means we can run a tighter labor force than we have historically."

     -- FRAMEWORK REVIEW

     Kaplan said he wouldn't be averse to seeing the Fed's 2% symmetric

inflation objective being set over a longer period.

     "I would be supportive of revisiting our target to maybe lengthen the

averaging period beyond what we currently do," Kaplan said. "The only thing I am

not willing to do is make forward commitments on what action we are going to

take in the future based on the analytic."

     Kaplan said he would not be willing to set negative rates in the U.S. and

doesn't think the Fed should do so.

     Kaplan said discussion about yield curve control, a tool in which other

members of the Fed have indicated interest, is outside the scope of the Fed's

current framework review that is expected to conclude by the middle of 2020.

     -- REPO PREPARED FOR YERA-END

     Kaplan reiterated that the mid-Sept. spikes in overnight funding rates were

the result of a confluence of factors ranging from increased debt issuance to

tighter bank regulation.

     He expected "some" volatility going into the year-end as big banks pare

down their balance sheets for regulatory purposes. The Fed, Kaplan said, will

need to further consider a standing repo facility in 2020 to avoid pressures in

short-term funding markets and to provide a needed backstop.

     "I think that would be healthy," Kaplan said when asked whether the Fed

should consider regulations surrounding preferences for Treasuries versus

reserves.

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

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