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Fed's Kaplan says gradual rate hikes must continue, concerned over US debt

Dallas Federal Reserve President Robert Kaplan wrote Feb. 21 that the Fed must continue gradually raising interest rates, cautioning that holding off on rate hikes would make a recession more likely.

Kaplan did not say how many times he thinks the Fed should increase rates in 2018, though he has previously said he supports doing so three times.

"I continue to believe that gradual and patient removals of accommodation will increase the likelihood of extending the economic expansion in the U.S.," he wrote in an essay outlining his views on the economy. "History suggests that if the Fed waits too long to remove accommodation at this stage in the economic cycle, excesses and imbalances begin to build, and the Fed ultimately has to play catch-up. In my judgment, getting behind the curve and then trying to catch up would increase the likelihood of recession in the U.S."

The U.S. economy, he predicted, would grow at 2.5% to 2.75% this year, helped by increased consumer and business spending and driven in part by tax cuts that President Donald Trump signed into law. The added boost from the tax cuts, he added, will be less prominent in 2019 and 2020. He expects inflation to keep strengthening this year and make progress toward the Fed's 2% goal.

Kaplan also wrote there is a "legitimate concern" that U.S. government debt levels could increase to unsustainable levels, noting that they are currently at 75% of GDP. The tax cuts, he added, will further add to debt levels at a time when the government should look to decrease them so it has more flexibility to deal with the next recession.

"At a minimum, higher government leverage will make it less likely that fiscal policy will be a realistically available tool during the next recession," he wrote. "While addressing this issue involves difficult political considerations and policy choices, the U.S. may need to more actively consider policy actions that would moderate the path of projected U.S. government debt growth."