Fed should ‘get out of the way’ on rate hikes: Kaplan

February 1, 2019

By Ann Saphir

AUSTIN (Reuters) – The Federal Reserve needs to “get out of the way” until at least mid-year, Dallas Fed President Robert Kaplan said on Friday, citing downside risks to the U.S. economy including slowing global growth, weakness in housing and manufacturing and tighter financial conditions.

“It’s very important that the Fed get out of the way here and take no action in terms of the Fed funds rate for the time being,” Kaplan told the Texas Lyceum in Austin, adding that his base case is for the Fed to leave rates unchanged until at least June.

The Fed on Wednesday left rates unchanged, discarded a promise for “further gradual increases” in interest rates and said it would be “patient” before making any further moves. Fed Chairman Jerome Powell on Wednesday said the case for rate increases had “weakened” in recent weeks.

It was a big turnaround for the central bank, which just six weeks ago had signaled it would press ahead on interest rate hikes begun in December 2015.

The Federal Reserve Bank of Dallas president did say he retained the right to reexamine the Fed’s pause in rate hikes as more economic data come in.

For the next couple of quarters, he said, “my base case is the Fed would take no action on the Fed funds rate at all so I guess that would take us through June.” By then, he said, “I am hopeful that some of these uncertainties and issues will resolve themselves.”

Kaplan did not comment on a report early Friday showing U.S. job growth surged in January. Instead he said he sees downside risk to his forecast for 2 percent growth this year, including slowing growth in China and elsewhere, and widening credit spreads in U.S. financial markets that suggest financial conditions are tighter and less conducive to growth.

He also said he saw signs that interest-rate-sensitive parts of the economy like housing and manufacturing are already weakening, though the Fed’s rate hikes over the past several years have yet to fully make their way through the economy.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama and David Gregorio)