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Fed's Kaplan: Accommodation removal should be done in 'gradual and patient' way

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Fed's Kaplan: Accommodation removal should be done in 'gradual and patient' way

Dallas Federal Reserve Bank President Robert Kaplan suggested the Fed must balance its desire to get ahead of inflation by increasing rates with its desire to account for challenges to future economic growth.

In an essay published on Oct. 17, Kaplan wrote that if the Fed waits too long to see inflation grow, it could risk getting "behind the curve" and having to raise rates rapidly in response. In the past, Kaplan wrote, this has increased the chances of recession. Kaplan also wrote that he realizes the costs of keeping rates too low for too long. Low rates can hurt savers and create investing imbalances.

At the same time, Kaplan wrote that future economic growth faces structural challenges from an aging U.S. population. He wrote that the Fed's neutral rate, or the rate at which the economy has optimal employment and inflation, is likely to be lower than in the past because of this.

Kaplan, who is a voting member of the Federal Open Market Committee, wrote that with these considerations he is keeping an "open mind" about removing monetary accommodation in future FOMC meetings. Future removals, he wrote, should be done in a "gradual and patient" manner.

The Fed is widely expected to raise rates in December, according to the CME Group's FedWatch Tool, which pins rate hike chances at 98.5% as of 1:12 p.m. ET on Oct. 17.

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