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Repeats Story Initially Transmitted at 17:30 GMT Nov 27/12:30 EST Nov 27
--Will Likely Achieve 2% Inflation Target In Medium Term
--Labor Market to be Increasingly Overheated in Months Ahead
By Jean Yung
WASHINGTON (MNI) - Federal Reserve Bank of Dallas President Robert Kaplan
on Monday called for a near-term interest rate increase in light of a tightening
labor market and anticipated rise in cyclical inflation pressures.
"I believe it will likely be appropriate, in the near future, to take the
next step in the process of removing monetary accommodation," Kaplan said in an
essay titled "A Balanced Approach to Monetary Policy."
"This should be done in the context of an overall strategy of removing
accommodation in a gradual and patient manner. I believe this strategy will
increase the likelihood of sustaining and extending the economic expansion in
the U.S.," he said.
Cyclical inflationary pressures have so far been partially offset by
"structural headwinds of technology-enabled disruption" and globalization,
Kaplan said, depressing the overall inflation rate below the Fed's 2% goal for
the past several years.
But that balance should shift as the labor market becomes increasingly
overheated in the months ahead, he said. Dallas Fed economists believe the
economy is either at or near the level of maximum sustainable employment right
now and "may well move materially beyond maximum sustainable employment sometime
in 2018," he said.
"As labor market conditions continue to tighten, cyclical inflationary
forces should ultimately offset these structural headwinds such that we will
likely achieve our 2 percent target in the medium term," he said.
Meanwhile, potential economic and financial imbalances, if allowed to
build, could cause the Fed to fall behind the curve and threaten the
sustainability of the expansion, Kaplan said.
The neutral nominal interest rate is materially lower than historical
averages, he added, likely around 2.5%, due to aging demographics and slowing
workforce growth in the U.S. and abroad.
"As such, I think it is important that, to the extent possible, monetary
policy accommodation be removed in a gradual and patient manner. I would like to
avoid a situation where the FOMC is playing 'catch-up' in raising interest
rates," Kaplan said.
--MNI Washington Bureau; +1 202-371-2121; email: firstname.lastname@example.org