Why Kaplan sees rates holding this year

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Monetary policy levels are “roughly appropriate” and should not need alteration this year, Federal Reserve Bank of Dallas President Robert Kaplan said in an essay released Tuesday.

“It is my view that, based on my base-case outlook for the U.S. economy, the current setting of the federal funds rate at 1.5 to 1.75 percent is roughly appropriate,” he wrote. “Consistent with this view, my Summary of Economic Projections (SEP) submission in December 2019 indicated that I expected no movement in the federal funds rate through 2020.”

Federal Reserve Bank of Dallas President Robert Kaplan said he expects rates to remain where they are through 2020.

Should the economy not evolve as he expects, he could revise his thoughts. In addition to the “variety of economic developments” he will watch, Kaplan said he’ll monitor the coronavirus and its impact on the U.S. economy.

As for the Fed’s balance sheet, Kaplan expects “as reserves in the banking system meet or exceed ample levels of at least $1.5 trillion, the Fed balance sheet will expand only gradually to reflect trend growth in the demand for currency and other Federal Reserve liabilities.”

After active repo operations slow and reserve management purchases of Treasury bills wane later this year, “the pace of balance sheet expansion will moderate significantly.”

Kaplan said he backs “a review of our supervisory guidance and regulatory policies in an effort to assess whether we could put Treasury bills and reserves on a more equal footing in terms of bank liquidity management.”

The Bank expects gross domestic product to gain between 2% and 2.25% this year, as global and U.S. manufacturing will remain “sluggish,” although business fixed investment should “firm somewhat from disappointing levels in 2019.” Consumers should continue to fuel “solid growth in 2020.”

The coronavirus “will likely mean slower growth in China and risks to the downside for global growth,” although it remains too early “to predict with confidence the ultimate impact of this virus on the U.S. and global economies.”

Additionally, the Boeing delay of production on it 737 Max airplane could cut GDP “by as much as 0.4 percent (annualized) in the first quarter of 2020.”

In a note Tuesday morning, BNP Paribas suggested the virus will be subtract 0.2 percentage points from GDP in the first quarter.

The Federal Reserve Bank of New York’s December Survey of Consumer Expectations, indicated consumers continue to spend for now, with spending up 2.5% year-over-year, the highest level since April 2015, and more than three out of five households having made a “large purchase” in the past four months.

But expectations slipped, with median household spending seen growing 2.3% in the next year, down from 2.8% a year ago.

Manufacturing
Business activity improved in New York State in February, the Empire State Manufacturing Survey, released Tuesday by the New York Fed, suggested. The general business activity index climbed to 12.9, its highest level since May, from 4.8 a month earlier.

Economists polled by IFR Markets expected a 5.0 read.

“Thirty-four percent of respondents reported that conditions had improved over the month, while 21% reported that conditions had worsened,” the report said.

New orders surged to 22.1 from 6.6, while shipments rose to 18.9 from 8.6. Employment grew at a slower pace while the average workweek dipped to negative 1.0.

Housing
Builder confidence remained high, as the National Association of Home Builders/Wells Fargo Housing Market Index slipped to 74 in February from 75 a month earlier.

Economists expected the index to hold at 75.

“Steady job growth, rising wages and low interest rates are fueling demand but builders are still grappling with increasing construction and development costs,” according to NAHB Chairman Dean Mon.

Each of the three component indexes fell a point in the month.

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