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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