Fed's Kaplan : Reserving Judgment on Need for Another Rate Cut

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10/10/2019 | 12:14 pm


By Michael S. Derby



Dallas Fed President Robert Kaplan said Thursday the central bank's two rate cuts thus far this year were the right thing to do, but he's reserving judgment about what should happen next.



"I am concerned that if non-U.S. growth continues to decelerate, and weakness in U.S. manufacturing and business investment intensifies, this weakness could spread to the broader U.S. economy, ultimately impacting consumer confidence and spending," Mr. Kaplan wrote in an essay affirming his support of both rate cuts.



But as the Fed approaches the rate-setting Federal Open Market Committee meeting scheduled for Oct. 29-30, it is too soon to say what should happen next, Mr. Kaplan said.



"Having adjusted the policy rate twice this year, it is my intention to take some time to carefully monitor economic developments," the official said. "I intend to avoid being rigid or predetermined from here, and plan to remain highly vigilant and keep an open mind as to whether further action on the federal-funds rate is appropriate."



Mr. Kaplan isn't currently a voting member of the FOMC, which lowered its overnight target rate range by a quarter percentage point in both July and September. Markets see another cut at the end of the month. The Fed trimmed the cost of short-term borrowing to provide an otherwise healthy economy with some extra support at a time of slowing global growth and rising uncertainty around trade. Lower rates were also aimed at boosting inflation back to the 2% target.



Most Fed officials have been on board with lowering rates, and some have called for an even more aggressive campaign of lowering rates. But other Fed officials, like the leaders of the Boston and Kansas City Fed banks, have preferred for the Fed to wait until more tangible evidence of economic trouble arrives before acting. That said, those two officials haven't taken anything off the table for the coming meeting.



Mr. Kaplan acknowledged that the Fed faces a balancing act with monetary policy right now.



"I am mindful of the potential excesses and imbalances that can be created as a result of excessive accommodation," he said. "I am also alert to the possibility that recent escalations in trade tensions could moderate somewhat and this, in turn, might alleviate some of the downside risks to the U.S. and global economies," he added. But Mr. Kaplan also said it is important for the Fed to look ahead and act before genuine trouble strikes.



"If we wait to see weakness in the consumer before taking action, we will have likely waited too long," Mr. Kaplan said. "From a risk-management point of view, that is a mistake I prefer not to make."



In his essay, Mr. Kaplan also said he supports the Fed finding a more enduring technical fix for what has been unexpected volatility in short-term lending markets. The Fed will soon start growing its balance sheet to help with the situation, but there are other options on the table as well.



"I support more-permanent steps to ensure the proper functioning of repo and other short-term funding markets," Mr. Kaplan said. "I am also supportive of taking steps to adjust the size of the Federal Reserve's balance sheet in order to help achieve our objective of implementing policy in an ample-reserves regime," he said.



Write to Michael S. Derby at michael.derby@wsj.com





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