Dallas Fed president: Too early to tell whether rate cut will be warranted

Federal Reserve Bank of Dallas President Robert Kaplan said it is too soon to say whether the Fed will need to reduce interest rates in coming months due to rising uncertainty over trade tensions and weaker global growth.

“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,” said Mr. Kaplan in an essay published Monday afternoon. “At this stage, I believe it is too early to make a judgment on this question.”

Mr. Kaplan’s essay indicates he supported last week’s decision by the Fed’s rate-setting committee to hold its benchmark rate steady in a range between 2.25% and 2.5%. Nearly half of officials indicated they thought lower rates would be needed by year’s end, in projections released after the meeting.

Nine of 10 voting members of the Federal Open Market Committee approved the rate decision last week, with St. Louis Fed President James Bullard dissenting in favor of lower rates. On Friday, Minneapolis Fed President Neel Kashkari said he would have voted to cut the benchmark rate last week by 0.5 percentage point.

Mr. Kashkari and Mr. Kaplan aren’t voting members this year.

Trade tensions between the U.S. and China and the U.S. and Mexico escalated in May. While the U.S. suspended potential tariffs on Mexico, the prospect for any resolution with China hangs for now on the outcome of a meeting later this week between President Trump and Chinese President Xi Jinping.

Because the trade-policy outlook has darkened suddenly, Mr. Kaplan said, “it would be wise to allow events to unfold a bit more before making judgments regarding the stance of monetary policy.”

The Dallas Fed leader suggested that any move toward lower interest rates would require the central bank to lean more heavily on stronger regulation to guard against potential excesses from building in the economy, particularly with respect to fueling more leverage in the corporate sector. With businesses less able to pass higher prices on to their customers, “debt-financed activity becomes harder to resist,” he wrote.


Business debt that is used to buy back shares or finance corporate acquisitions can help boost earnings during good times, but could hurt balance sheets during downturns. “This is just one example of the type of excess that may seem innocuous when times are good, but can become more troublesome in a downturn,” he said.

As a result, Mr. Kaplan said it was important for the central bank to maintain stronger capital requirements and stress testing for banks, and for regulators to watch nonbank financial companies carefully. Tougher oversight “should provide more flexibility for monetary policy to deal primarily with economic conditions,” he wrote.