Although his mind remains open, Federal Reserve Bank of Dallas President Rob Kaplan said Tuesday he expects gradual rate hikes will remain appropriate.

“I believe that we are making good progress in reaching our full-employment objective,” Kaplan wrote in an essay, according to prepared text released by the Fed.

He pointed to “healthy” consumer activity, strengthening business activity and global growth.

Federal Reserve Bank of Dallas President Robert Kaplan
Federal Reserve Bank of Dallas President Robert Kaplan Bloomberg News

While GDP remains “sluggish by historical standards, it should be sufficient to continue to remove slack from the labor market,” he wrote.

Although at this point in a recovery there should be “increasing evidence of inflation pressures,” Kaplan wrote he believes “cyclical inflationary pressures are building,” but they “are being at least partially offset by secular forces.”

Waiting too long for inflation can put the Fed “behind the curve,” leading to steeper hikes, and increasing the risk of recession. But too much accommodation can be risky too. “It has been my experience that significant imbalances are often easier to recognize in hindsight and can be very painful to address,” he wrote.

The aging population will continue to slow workforce growth, and “continue to pose challenges for future economic growth. As a result, my view is that the neutral rate, the interest rate at which we are neither accommodative nor restrictive, is likely to be much lower than we are historically accustomed. Therefore, I have argued that future removals of accommodation should be done in a gradual and patient manner,” Kaplan said.

“Based on these considerations, I intend to keep an open mind about removing accommodation in upcoming FOMC meetings. In the months ahead, I will continue to assess the economy’s progress in removing labor slack, and I will be looking for evidence that building cyclical forces have the prospect of offsetting structural headwinds, such that we can expect to make progress toward meeting our 2 percent inflation objective in the medium term. Given the strength of the U.S. economy, I think it is likely we will see greater evidence of this progress and, as a consequence, it will be appropriate to continue the process of gradually removing monetary accommodation.”

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Gary Siegel

Gary Siegel

Gary Siegel has been at The Bond Buyer since 1989, currently covering economic indicators and the Federal Reserve system.