Why Rob Kaplan doesn’t back rate cuts at this moment

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The Federal Reserve should let events play out before making any changes to monetary policy, Federal Reserve Bank of Dallas President Rob Kaplan wrote in an essay published Monday.

“I believe that we currently are in the neighborhood of a neutral setting for monetary policy — that is, we are likely neither accommodative nor restrictive,” he wrote.

Trade tension and decelerating global growth sparked “downside risks” to the outlook and the effects of fiscal stimulus are “waning,” he wrote. “The question is whether trade and global growth uncertainties are likely to persist in a manner that leads to a material deterioration in the outlook for U.S. economic growth.

“At this stage, I believe it is too early to make a judgment on this question,” he said. “I believe it would be wise to allow events to unfold a bit more before making judgments regarding the stance of monetary policy.”

Kaplan said he would “be highly vigilant” to “trade tensions and indications that slowing global growth is spilling over into a material deterioration of the economic outlook for the U.S.”

Remaining patient is especially valid now, Kaplan wrote, since he sees “solid GDP growth in 2019, and I expect labor market conditions to remain at levels I would consider at or past full employment. In addition, financial conditions — the cost and availability of credit — are particularly robust by historical standards.”

His fear is that additional accommodation “would contribute to a build-up of excesses and imbalances in the economy which may ultimately prove to be difficult and painful to manage.” He specified high corporate debt as an example.

In addition to economic uncertainties, markets react to expectations for Fed policy moves, he said.

“As I have said before, I would be concerned about an inversion of the curve — either three-month to 10-year or one-year to 10-year—of some size and duration,” Kaplan said. “My concern emanates from my belief that an inverted curve ultimately makes it more difficult for financial intermediaries to borrow short and lend long — and, if the inversion persists, it would likely begin to impede the creation of credit and lead to a tightening of financial conditions.”

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Monetary policy Robert Kaplan Federal Reserve Bank of Dallas