REPEAT: MNI: Fed's Kaplan: High Govt Debt Adds Headwinds

Repeats Story Initially Transmitted at 13:29 GMT Apr 10/09:29 EST Apr 10

By Iris Ouyang

     BEIJING (MNI) - Dallas Fed President Robert Kaplan cautioned Tuesday in

Beijing that the high debt to GDP ratio in the US could pose a headwind for

economic growth and inflation when answering a question from MNI.

     In a close-door interview after a discussion held by Qsinghua University,

Kaplan said the U.S. government debt is at a high level, and when it turns

unsustainable it may make the U.S. economy deflationary.

     "It's a challenge we have to deal with in the years ahead," he said,

answering a question from MNI, adding the U.S. should be "mindful" with the

country for the first time concurrently going through three biggest economic

challenges - aging population, sluggish productivity and high debt to GDP ratio.

     It may make the robust GDP growth, as a tailwind for the U.S. economy this

year, turn into a headwind under such circumstance, Kaplan noted.

     Kaplan is upbeat on the U.S. economic growth this year on the good shape of

the household sector after eight years of deleveraging and stronger investment

due to tax cuts.

     But the U.S. additional growth driven by tax cuts and other reforms will

not offset the impact of reduced tax revenues pushing debt level at historical

level, Kaplan said.

     "We ought to looking for ways to deleverage," he noted.

     He noted the U.S. economic growth in 2019 will be weaker though GDP growth

may not have as much impact on the monetary policy as much as people may think.

     "It should not unduly impact inflation rate," he said.

     He stressed Fed fund rate changes need to be made gradually and with

patience, while maintaining his stance the Fed would increase benchmark interest

rate for three times this year.

     Amid trade conflicts between China and the U.S., Kaplan said both countries

need to have better mutual understanding and dialogues because interest links of

the two countries are very strong.

     Noting it's "legitimate" for China and the U.S. to discuss their trade

agreements, Kaplan said specific tactics to solve the problem needs to be

discussed. He said he's confident the world's two largest economies will work

the issue out, though he noted that the process could be painful.

     "The issues are so complicated that it may not resolved very soon," he said

there would be very tough behind-the-scene discussions though on the surface the

rhetoric could show conflict de-escalation.

     Kaplan also stressed the U.S. regulators should implement more tailored

financial regulations on banks. It should continue high regulatory pressure on

big banks, including strong capital requirements and stress testing, while

reduce regulatory burdens of small and mid-sized banks.

     When discussing high market volatility recently, he said the world is in a

late-cycled period in general as central banks raise rates in an adjustment

stage, and he expects it to continue for some time.

     But he said he's worried about complacency as during a period of low

volatility there is a tendency for excessive debt to build up.

--MNI Beijing Bureau; +86 (10) 8532-5998; email: iris.ouyang@marketnews.com