The Federal Open Market Committee was "prudent" to not raise rates at its last two meetings, according to Federal Reserve Bank of Dallas President and CEO Rob Kaplan, who noted that accommodation, although not necessarily near zero rates, would be appropriate for "some time."
"However, accommodative policy does not necessarily mean a zero fed funds rate," Kaplan said his first policy speech since being named Dallas Fed president. "There are various costs to maintaining a zero fed funds rate for too long — particularly in terms of potential distortions in investment and business decisions. These distortions can create imbalances in investments, inventory and hiring decisions that may later need to be (painfully) unwound when policy normalizes. My experience is that these imbalances are sometimes tough to see in real time but often relatively easier to recognize in hindsight," he said according to prepared text released by the Fed.
Kaplan said the full-employment objective is within reach and the inflation rate should rise to the Fed's 2% target "over the medium term."
"[I]t will likely be appropriate that U.S. monetary policy remain accommodative for some time," Kaplan noted. "Moreover, a lower-than-usual federal funds rate may well be needed to achieve any given desired level of accommodation."
Further, he noted, normalization would be gradual. Issues "will have to be assessed and reassessed as the economic outlook unfolds," he said. "In my view, the FOMC — in the previous two meetings — has been prudent in waiting for more data before taking policy action."
