Central Banks

Monday, June 24, 2019 - 15:00

MNI POLICY: Fed's Kaplan Urges Watch, Wait Before Easing


By Jean Yung

WASHINGTON (MNI) - Federal Reserve Bank of Dallas President Rob Kaplan on Monday urged policymakers to allow events to unfold before lowering interest rates, adding it's too early to judge whether trade tensions and a global economic slowdown will cause a material deterioration in the U.S. outlook.

Easing policy now would "contribute to a build-up of excesses and imbalances in the economy which may ultimately prove to be difficult and painful to manage," he warned.

"Monetary accommodation is not 'free,'" he said in an online essay. "I intend to be highly vigilant with regard to the persistence of heightened trade tensions and indications that slowing global growth is spilling over into a material deterioration of the economic outlook for the U.S."

"In the meantime, I believe it would be wise to take additional time and allow events to unfold as we consider whether it is appropriate to make changes to the stance of U.S. monetary policy," he said.

The following are other major points from his essay:

--Downside risks have risen over the past two months. Tariffs and trade uncertainty "appear to be having a negative impact on companies' ability to manage input costs and some chilling influence on their capital spending plans," he said. Meanwhile, risks to the global outlook appear to be tilted to the downside.

--The Dallas Fed's Trimmed Mean PCE inflation measure, an alternate measure of underlying inflation, is running at around 2%, suggesting PCE inflation will head higher over the next year. Cyclical inflation forces are building, but structural forces of technology-enabled disruption may be muting inflation.

--Kaplan is closely monitoring the shape of the yield curve and would be concerned about an inversion of either the 3-month-10-year or 1-year-10-year curves. The current flatness of the curve is indicative of "sluggish expectations for future growth -- and recent heightening of trade tensions has likely exacerbated these growth concerns," he said.

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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