By Jerry Kronenberg
DALLAS, Texas (MaceNews) – Dallas Federal Reserve President Robert Kaplan said Thursday that the Fed no longer believes the U.S. economy’s downside risks outweigh its upside potential, but that he doesn’t favor raising interest rates yet.
“I think the outlook has stabilized — if anything firmed,” Kaplan said in remarks to reporters following a speech to a University of Texas McCombs School of Business forum. “All indicators that I’m seeing are causing us to be a little bit more confident and firming in outlook.”
Minutes released in January from the FOMC’s December meeting quoted Fed staffers as saying that “risks to the forecast for real GDP growth were tilted to the downside.” But Kaplan said recent stronger-than-expected economic figures such as this week’s ADP report on U.S. private-sector jobs mean that’s no longer true.
That’s an about-face for the FOMC, which cut its key federal funds rate three times in 2019 to a 1.5%-1.75% range amid some signs of economic weakness.
Still, the Dallas Fed chief said it’s “too soon to judge” if the central bank should reverse gears and begin hiking rates until the FOMC sees how various economic developments play out.
For instance, Kaplan said he wants to see if the global corona-virus outbreak harms worldwide commerce. He also plans to monitor how much Boeing’s recent production halt for its troubled 737 Max affects the U.S. economy.
“I haven’t seen anything yet that would cause me to want to alter monetary policy in [2020] either up or down,” Kaplan said. “I still think we are in the margin accommodative, [and] I think the setting is roughly appropriate based on my outlook.”
In other remarks to reporters and in his earlier speech, Kaplan said:
U.S. Inflation Seems to Be Nearing the Fed’s 2% Target
While inflation has long remained a bit below the central bank’s goal, Kaplan said that “my base case is still expecting headline inflation to trend in the medium term toward 2%. … We continue to believe that we’ll gradually, over time, continue to move to 2% [inflation].”
The Fed’s Balance-Sheet Growth Should Soon Slow
The central bank boosted its balance sheet sharply in late 2019 to break a liquidity crisis in the banking sector’s repo market, where rates suddenly shot up in September. However, Kaplan said the balance sheet’s growth should slow down in the coming months.
“I would expect … from here to June that we’ll see that the growth in the Fed balance sheet will moderate. And I’d be hopeful and expect that as we continue bills purchases during the second quarter, the repo usage will begin to decline and the headline net balance-sheet growth for the Fed will moderate – certainly far more moderate than what’s we’ve seen to this period.”
The U.S. Economy Is Good
“We think we’re going to have a solid year of growth in 2020,” Kaplan said, adding that things would look even better if the corona-virus outbreak and Boeing 737 woes weren’t hampering the U.S. economy.
The central banker said he thinks Boeing’s problems alone could shave “as much as 0.4%” off of 2020 U.S. gross domestic product growth.
Improved Trade Relations Are Helping
Kaplan said the recent U.S.-Chinese Phase 1 trade agreement, the final approval of U.S.-Mexico-Canada Agreement on trade and Britain’s long-delayed exit from the European Union have lessened uncertainties that threatened U.S. and global growth.
“We hope there will be more stability in trade” in 2020, Kaplan said.
U.S. Manufacturing Is Improving, But Business Investment Isn’t
“Manufacturing in the United States was a weak in 2019 as it has been since 2009 … but we expect that to stabilize this year,” Kaplan said. However, he noted that U.S. business fixed investment “was sluggish [in 2019], and we don’t think it’ll be too much better in 2020.”
The Dallas Fed chief blamed much of the problem on falling energy-sector capital expenditures in the wake of soft oil prices.