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