Dallas Fed's Kaplan Says He Argued for December's Rate Rise

  • Sees unemployment falling, inflation rising amid job gains
  • Expects oil glut to make 2016 difficult year for producers

Federal Reserve Bank of Dallas President Robert Kaplan said he pushed for the central bank’s decision last month to raise interest rates for the first time in nearly a decade and laid out reasons the economy may warrant staying on a path toward higher borrowing costs.

“There are various costs to maintaining excessive accommodation for too long —particularly in terms of potential distortions in investment, inventory and hiring decisions,” Kaplan said in a speech Monday in Dallas, noting that he "argued for" the move. “My experience is that these imbalances are sometimes easier to recognize in hindsight.”

The Federal Open Market Committee voted unanimously Dec. 16 to raise the target range for the federal funds rate a quarter percentage point to 0.25 percent to 0.5 percent, the first increase since 2006. As joblessness falls and expectations for future price increases hold up, policy makers have said they made the move partly to avoid getting behind the curve on inflation and having to hike sharply.

“I believe that continuing along the path of monetary policy normalization is important,” Kaplan said in his prepared remarks. “If we delay further normalization until we actually see evidence of excessive accommodation, there is a risk that we will have waited too long."

Answering questions from reporters after his speech, Kaplan said the Fed is watching turmoil in high-yield markets and still assessing the fallout as stock markets gyrate on concerns over China.

Unusual Start

Kaplan said "this is an unusual start to the year,” given recent market turmoil, likening it to tumult last year that caused the Fed to hold off on raising rates as many had expected in September.

“It may not turn out the way August, September did, but we went through this in August and September -- we paused, we watched, we let events unfold, which was the right way to handle it,” Kaplan said, explaining how in that case, economic fundamentals held up. "It takes time to determine that.”

Kaplan said that a pace of four rate hikes this year -- the median of policy makers’ projections from the December meeting -- is not "baked in the cake," echoing a sentiment from San Francisco Fed President John Williams. He also said the Fed will probably not have enough data before its next meeting in late January to form a decision on interest rates.

“There will be information, whether sufficient for us to make a decision is another question. Between now in March, yes, I think there will be,” Kaplan said.

In his speech, he said that as the tightening cycle progresses, he will be monitoring various measures of labor-market slack to assess how close the economy is to reaching full employment, which could in turn trigger quicker inflation.

Job Growth

Dallas Fed economists project the U.S. needs to add between 100,000 and 150,000 jobs each month to keep the unemployment rate constant, and they forecast the jobless rate to continue falling through 2016, Kaplan said. In a globalized marketplace where companies can produce goods in many countries to reduce costs, the jobless rate may fall for a time below the level historically associated with full employment without triggering "undue inflation pressures," he said.

Still, Kaplan said further reduction in labor-market slack should ultimately help to push the personal consumption expenditure measure of inflation back toward the Fed’s 2 percent goal, which it hasn’t touched since 2012, by year-end 2017.

“As the unemployment rate moves below 5 percent, I would expect to see the inflation rate gradually increase toward our 2 percent objective in the medium term," Kaplan said.

Some of the prolonged softness in price pressures may come from changing technologies -- such as ride-service Uber Technologies Inc. or room-renting service Airbnb Inc. -- which allow consumers greater bargaining power, he suggested.

Dallas Fed economists project that global growth excluding the U.S. this year will improve to 2.9 percent from 2.5 percent in 2015, an outlook that Kaplan characterized as "relatively sluggish" compared with prior growth rates and as coming "with some meaningful level of downside risk."

China Worries

He cited China as a concern, saying that "it seems probable that the world will have to adjust to lower levels of Chinese growth in the years ahead," which could further impact commodity prices and "create headwinds for GDP growth in the U.S. and other economies."

Kaplan also said that "2016 will be a challenging year for oil producers" as a supply glut persists and is potentially worsened by the lifting of Iran sanctions. At the same time, low prices have helped to generate stronger car sales and driving, underpinning the Dallas Fed’s expectation for a 1.4-million-barrel-per-day increase in global consumption in 2016, he said.

Kaplan, 58, became Dallas Fed President last year and gave his first monetary policy speech in November. He does not vote on monetary policy until 2017.

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