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REPEAT: Fed's Kaplan: Can Be Patient on Next Rate Hike

MNI (London)
Repeats Story Initially Transmitted at 18:51 GMT Aug 17/14:51 EST Aug 17
--Looking for Progress on Inflation 
--Balance Sheet Run-Off Can Begin 'Soon'
--Neutral Rate Has Fallen; Closer to 2% Than 3% 
By Jean Yung
     WASHINGTON (MNI) - Federal Reserve Bank of Dallas President Robert Kaplan
said Thursday the Fed can afford to be patient in raising interest rates in the
face of weaker-than-expected inflation readings, though he supports starting to
cut the balance sheet soon. 
     "At this stage I'd like to see more progress, particularly in the Fed
reaching its inflation target, before I consider another rate increase," he told
the Lubbock Chamber of Commerce in Texas. Kaplan is a voter on the rate-setting
Federal Open Market Committee this year. 
     His comments come after the minutes of the last FOMC meeting revealed
Wednesday some other officials also argued against further rate hikes until new
data confirmed inflation was more clearly on a path toward the Fed's 2% target. 
     The FOMC had forecast one more hike for the year, but consumer inflation as
measured by the core personal consumption expenditures price index slowed in the
spring and rose just 1.5% from a year earlier in July. 
     Another reason to be patient on raising interest rates is the so-called
neutral rate, the setting for the fed funds rate that's neither accommodative
nor stimulative, has fallen from five to 10 years ago, Kaplan said. It's
currently "closer to 2% than to 3%," he said. 
     That also "tells me we have to be careful on our further moves on the fed
funds rate," he said.
     The Dallas Fed chief cited as a further reason for caution the risk that
the yield curve could flatten or become inverted, given the spread between the
2-year and 10-year Treasury yields is narrow at just 90 basis points. 
     An inverted or flat yield curve "historically has been a sign of economic
trouble," so minimizing that risk offers another reason "we should be very
patient and judicious on our next moves on the fed funds rate," Kaplan said. 
     The 10-year Treasury yield, at just 2.23%, signals expectations of economic
growth are sluggish, Kaplan said. He added he expects GDP to expand just over 2%
this year. 
     Some factors driving slow growth are an aging population and a slow growing
workforce, Kaplan said, issues that monetary policy cannot dress. The economy
could benefit from broader economic policies including regulatory review,
immigration, infrastructure spending and better skills training, he said. 
     The economy still has room to "grow jobs," Kaplan said, though that space
might be limited. The U-6 rate of unemployment, which includes discouraged
workers and those who want to work full time but are only working part time,
measures at 8.6% today, compared to 8.1% before the recession. 
     "We got some slack, but it's not as substantial as people think," Kaplan
said. 
     Like many of his FOMC colleagues, Kaplan said it would soon be time to
begin the process of ending reinvestments in order to shrink the Fed's balance
sheet. 
     "I think we should begin the process soon of letting our balance sheet
begin to run off," he said. 
     "We've designed this run-off in a way so it's very gradual," Kaplan said.
"We can actually do this run-off without having a material effect on the price
levels of these securities."
--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com

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