The New Dallas Fed President Has a Very Different View Than His Predecessorby
In first policy speech, says accommodation still appropriate
Notes that near-zero rates risk causing economic imbalances
Robert Kaplan broke from his predecessor’s inflation-hawk tradition in his first policy speech as president of the Federal Reserve Bank of Dallas, saying that monetary policy ought to remain easy for some time.
"In my view, the FOMC -- in the previous two meetings -- has been prudent in waiting for more data before taking policy action," Kaplan said in remarks prepared for a speech in Houston on Wednesday. Kaplan cited ongoing external risks, including those from China, among the reasons for caution. At the same time, “accommodative policy does not necessarily mean a zero fed funds rate,” which is where it’s been held since 2008.
While Kaplan is not scheduled to vote on the rate-setting Federal Open Market Committee until 2017, his monetary policy views are important because he will contribute to the debate at every FOMC meeting. The tone of Kaplan’s comments mark a departure from the views of former Dallas Fed President Richard Fisher, who was an outspoken anti-inflation hawk and dissented on several occasions in favor of tighter monetary policy.
"It is probable that the return to ‘normal’ interest rates will be gradual," Kaplan said. At the same time, the former banker and professor said he’s attuned to the risk that a zero fed funds rate can create "potential distortions" and "we’re sensitive to the fact that monetary policy affects the economy with a lag."
"I think we should be accomodative, but I think there’s a cost to being at zero for too long in terms of potential distortions and imbalances,” Kaplan told reporters after delivering his speech.
Fed officials are weighing when to raise rates for the first time since 2006 and a majority of investors expect them to announce liftoff next month, following a solid October reading on the labor market. Officials also made an explicit reference to the December meeting in their Oct. 28 FOMC statement.
Fed minutes, which will be released Wednesday at 2 p.m. in Washington, should provide additional insight into the Fed’s October deliberations.
The job market has been a star performer as the central bank looks to fulfill its dual mandate of maximum employment and stable inflation, while price pressures have lagged. Employers in the U.S. added 271,000 new jobs in October, the most this year, yet the committee’s preferred inflation gauge hasn’t touched its 2 percent goal since 2012.
The Dallas Fed estimates job growth of 100,000 to 150,000 a month is enough to hold the jobless rate steady, according to Kaplan. Unemployment last month fell to a seven-year low of 5 percent.
"It appears that we are well on our way to meeting our full-employment objective," Kaplan said, noting that it’s hard to gauge full employment in a globalized world.
"At this point, the question is: How much ‘slack’ remains in the economy with the unemployment rate this low?" Kaplan said. "My own view is that excess capacity needs to be increasingly viewed in a global context -- particularly in assessing the level of unemployment that is consistent with price stability."
Still, "as the labor market tightens and certain transitory factors ultimately pass through the data, our economic team in Dallas still expects to see inflation gradually rising to 2 percent over the medium term,” he said.
Fed officials have been emphasizing that the pace of rate increases will be gradual and is the most important thing to watch as the hiking cycle gets going. Kaplan told reporters that gradual means that after acting, "we’ll assess the impact that it’s having, and reassess conditions."
While acknowledging that economic data would respond to monetary policy changes with a lag, he said "you assess current conditions, domestically, globally, and make our best judgment based on that."
Kaplan, who has attended two FOMC meetings, was previously a professor of management practice and a senior associate dean at Harvard Business School. Before joining Harvard, he spent 22 years at Goldman Sachs and was vice chairman in charge of investment banking when he departed.
While speaking today, Kaplan also detailed the Dallas Fed’s outlook for the energy industry, which makes up 14 percent of Texas’ gross domestic product. Oil prices have slumped since mid-2014 as production has exceeded supply, leading to a build in crude inventories.
"It is our view that it will not be until late 2016 or early 2017 before inventories stabilize and daily production and consumption reach some reasonable degree of balance," Kaplan said, noting that factors like demand from China and the U.S. also play a role. "As market participants work to get a grip on the speed of this balancing process, we expect to see significant price swings and volatility. We also expect to see more bankruptcies, mergers and restructurings in the energy industry."