Robert Kaplan says Fed should hold, barring ‘material’ change in outlook

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The Federal Reserve should keep interest rates on hold next year, unless there’s a material change in the outlook for the U.S. economy, Dallas Fed President Robert Kaplan said.

“I’ve already got baked into my outlook, we’re going to have weak manufacturing next year, sluggish global growth, pretty sluggish business investment, but with a strong consumer,” Kaplan said Tuesday in a Bloomberg Television interview. “There would have to be some material change from that outlook” for him to back a rate change, said Kaplan, a 2020 voter on the policy-setting Federal Open Market Committee.

The committee left rates unchanged at its Dec. 10-11 meeting and signaled it would likely be on hold next year. The decision followed rate cuts at each of the previous three gatherings, designed to offset risks from slowing global growth and trade-policy uncertainty.

Looking ahead, the Dallas Fed chief brushed off concerns about the health of the U.S. consumer.

“I’d been worried that weak business investment and weak manufacturing would seep into other parts of the economy. We haven’t seen that yet,” Kaplan said.

Tailwind for spending
“We’ve got a very tight jobs market, and there’s no evidence I see that the jobs market is doing anything but getting tighter. That’s a pretty good tailwind for the consumer,” he said. “So, unless something changes, that causes the employment picture to change, the consumer is going to be solid for next year.”

The Fed is undertaking a review of its policymaking framework this year amid an environment of low inflation, which has mostly undershot the central bank’s 2% target since it was adopted in 2012. Officials have said they expect the results of the review to be made available in the course of next year.

One possibility under consideration is a shift toward targeting average levels of inflation over longer time frames, which would potentially keep interest rates lower than they otherwise would be and allow inflation to rise above 2% at times.

Kaplan voiced soft support for such a strategy.

“My view is I’d be willing to tolerate some overshoot of the 2% target as long as it’s not persistent,” Kaplan said.

“That’s a little different tolerance than we’ve had historically, where we — as we were approaching 2, and had a tight labor force, we thought we had to move,” he said. “I think there’s a little greater tolerance to take a little bit more risk on a little bit of an overshoot.”

Speaking earlier Tuesday at the Council on Foreign Relations in New York, Kaplan said “there’s not that much slack” in the U.S. economy, adding that “we think we’re at or past full employment in the United States.”

Bloomberg News