Ka­plan Backs Th­ree Rate Rises

L'Opinion - - The Wall Street & I'Opinion - Mi­chael S. Der­by

Dal­las Fed Pre­sident Ro­bert Ka­plan said he still fa­vors the cen­tral bank rai­sing short-term in­ter­est rates th­ree more times be­fore de­ci­ding whe­ther more in­creases will be ne­ces­sa­ry to keep the eco­no­my on an even keel.

This sug­gests the Fe­de­ral Re­serve should lift rates at its De­cem­ber, March and June po­li­cy mee­tings “un­less so­me­thing changes,” Mr. Ka­plan said Tues­day in a Wall Street Jour­nal in­ter­view.

Mo­ving along such a path would lift the Fed’s bench­mark fe­de­ral-funds rate to a range bet­ween 2.75 % and 3 %, and give him nine months to pon­der whe­ther he be­lieves the cen­tral bank will have to lift it hi­gher.

Mr. Ka­plan said it is hard to know pre­ci­se­ly where mo­ne­ta­ry po­li­cy shifts from being sup­por­tive of eco­no­mic growth to a stance that re­strains the eco­no­my. He said pro­duc­ti­vi­ty growth, which has been mo­dest, will fi­gure pro­mi­nent­ly in his thin­king on the mat­ter.

He and other Fed po­li­cy ma­kers are lif­ting rates to en­sure that the ra­pid­ly gro­wing eco­no­my doesn’t fuel ex­ces­sive in­fla­tion or dan­ge­rous fi­nan­cial as­set bubbles. But they are un­sure how far to go.

They rai­sed the fed-funds rate last month to a range bet­ween 2 % and 2.25 % and pen­ci­led in one more quar­ter-per­cen­tage-point in­crease this year and th­ree such moves next year.

Fed Chair­man Je­rome Po­well said then that rates re­main low en­ough to conti­nue sti­mu­la­ting eco­no­mic growth. But of­fi­cials have ex­pres­sed a range of views, and some un­cer­tain­ty, about how high rates would have to go to reach a so­cal­led neu­tral le­vel that nei­ther spurs nor slows growth.

The po­li­cy ma­kers’ la­test eco­no­mic fo­re­casts sho­wed a me­dian es­ti­mate of 3 % for this neu­tral point over the long term. But some es­ti­mate the neu­tral le­vel could be hi­gher in the short run.

Of­fi­cials pro­jec­ted they would lift the fed-funds rate to 3.4 % by the end of 2020.

Mr. Ka­plan, in res­ponse to a ques­tion, said he ho­ped the Fed could raise rates wi­thout cau­sing short-term Trea­su­ry yields to ex­ceed those on lon­ger-term se­cu­ri­ties, a de­ve­lop­ment that has pre­ce­ded re­ces­sions in the past.

Nor­mal­ly, the yield curve shows yields ri­sing as ma­tu­ri­ties grow lon­ger. When short-term yields rise above lon­ger-term yields, it causes a so-cal­led in­ver­sion of the yield curve. For much of this year, the gap bet­ween two-year and 10-year yields has nar­ro­wed, rai­sing concerns that an in­ver­sion might lie ahead.

This nar­ro­wing lar­ge­ly re­flec­ted Fed rate in­creases, which pu­shed up short-term Trea­su­ry yields rates at a time when ma­ny fac­tors are hol­ding down lon­ger-term yields. But the gap has wi­de­ned re­cent­ly as bond in­ves­tors have come to be­lieve the Fed plans to keep rai­sing rates, and as the eco­no­my shows si­gns of strong mo­men­tum.

Mr. Ka­plan said he isn’t rea­dy to say the threat of a yield curve in­ver­sion has been aver­ted.

“I do not want to kno­win­gly in­vert the yield curve,” he said, ad­ding that in­ver­sions are a “good for­ward in­di­ca­tor” of re­ces­sion.

Mr. Ka­plan al­so cau­tio­ned against bru­shing off the yield curve as an im­por­tant in­di­ca­tor. “I know the ar­gu­ment that maybe this is dif­ferent be­cause there’s so much glo­bal li­qui­di­ty,” he said. But in the end, it comes down to how the fi­nan­cial sys­tem works and in­fluences the eco­no­my, he said.

Mr. Ka­plan sug­ges­ted that in the de­bate over whe­ther in­ver­sions cor­re­late with or cause re­ces­sions, he saw more truth in the lat­ter po­si­tion.

“An in­ver­sion of some ma­te­ria­li­ty and du­ra­tion, it’s lo­gi­cal to me that that would have some constrai­ning ef­fect on fi­nan­cial condi­tions,” Mr. Ka­plan said.

“If you get in a si­tua­tion where a fi­nan­cial in­ter­me­dia­ry can­not bor­row short and lend long and make a spread be­cause of in­ver­sion, it’s lo­gi­cal to me that it’s going to put strains on cre­dit crea­tion,” Mr. Ka­plan said. “It may well create, if it goes on long en­ough, a tigh­te­ning in fi­nan­cial condi­tions which, all things being equal, can have a slo­wing ef­fect on the eco­no­my,” he said.

SIPA PRESS

Ro­bert Ka­plan, the Dal­las Fed lea­der, on Tues­day said, “I do not want to kno­win­gly in­vert the yield curve.”

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