Fed's Kaplan Maintains Need to Raise Rates

By Paul Vieira Features Dow Jones Newswires

Federal Reserve Bank of Dallas President Robert Kaplan said Wednesday he believes there should be two more additional rate increases in 2017, and even then monetary policy would still be accommodative.

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Mr. Kaplan said during a question-and-answer session at a Toronto dinner hosted by Canada's C.D. Howe Instititue think tank that the U.S. is "pretty darn close" to full employment and there is no much slack left in the economy.

Yet, he cautioned inflationary pressure remains slow and uneven, and that should give U.S. policy makers reason to proceed slowly when it comes to removing monetary-policy stimulus.

"I think we should be removing accommodation but we need to do it patiently," said Mr. Kaplan, a voting member of the interest-rate-setting Federal Open Market Committee. "We should be gradual and assess conditions as they unfold because of these secular headwinds" the U.S. faces, chief among them aging demographics.

His remarks in Toronto in part reinforce the main message emerging from the minutes of the meeting held earlier this month of senior Federal Reserve officials.

Those minutes, released earlier Wednesday, indicated another rate increase "soon" would be appropriate so long as economic data comes in largely in line with expectations.

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Mr. Kaplan statements also echo is his longtime support for slow and steady rate rises, points he reinforced in an essay published on Monday.

Speaking briefly to reporters after the event, he declined to comment about whether an increase in June was required, arguing he prefers to focus on the path of rates. "I plan to be vigilant in assessing incoming information if the economy unfolds more slowly, it could be less than [two more] rate increases or if it's strongly it could be more than that."

Economists and traders began to question the Fed's expected path of rate increases this year due to unexpected softness in recent inflation data and other indicators, and growing uncertainty about the Trump administration's ability to deliver aggressive tax reform and expansionary fiscal policy.

Fed officials left their benchmark short-term interest rates unchanged within a range between 0.75% and 1% at the meeting May 2-3, following an increase at their March gathering.

Mr. Kaplan also discussed the need to unwind the Fed's $4-trillion-plus balance sheet.

The minutes from the Fed's May meeting indicated "nearly all" participants backed an approach to tapering reinvestments of Treasury and mortgage securities by setting limits on the dollar amounts of holdings that could run off every month. The Fed could then increase those limits every three months over time to allow more securities to run off, under the approach envisaged.

He said the Fed needed to be mindful of daily trading volumes and be "sensitive" to the size of the securities runoff. "I am hopeful we can do it in a way that minimizes the impact on both the" Treasury and mortgage securities markets.

Meanwhile, Mr. Kaplan said research from Federal Reserve Bank of Dallas indicates close trading ties with both Mexico and Canada are "essential" for improving U.S. competitiveness. "I don't want to see anything that jeopardizes those relationships, and will cost U.S. jobs," he told the Toronto audience. "I am hopeful these agreements will be negotiated in a constructive way."

The Trump administration notified Congress earlier this month of its intention to renegotiate the 23-year-old trade pact, and formal talks are expected to begin by mid or late August.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

May 24, 2017 21:39 ET (01:39 GMT)