trending Market Intelligence /marketintelligence/en/news-insights/trending/o2mmdmexhq4hlw5qlz4aqq2 content esgSubNav
In This List

Dallas Fed chief: 3 more rate hikes likely through June, then a reassessment

Blog

Banking Essentials Newsletter 2021: December Edition

Blog

Automating Credit Risk Surveillance Using Statistical Models

Video

S&P Capital IQ Pro | Powered by Expert Insights

Blog

Post-webinar Q&A: Speed and Scalability – Automation in Credit Risk Modeling


Dallas Fed chief: 3 more rate hikes likely through June, then a reassessment

The Federal Reserve should stick with its current track on interest rate increases but the central bank may have to re-evaluate its approach after next summer, Dallas Federal Reserve President Robert Kaplan said.

"I have good conviction that we should see three more hikes through June," Kaplan said in response to news media questions at an Oct. 9 meeting of the Economic Club of New York.

By next year, however, the economy and outlook may have changed significantly, at which point the central banker said he would want to assess what he thinks the neutral rate should be. The neutral rate is a rate set by the Fed that neither stimulates nor restrains the economy.

In the short run, if the Fed sees inflation pick up, determining how much of that is due to transitory factors and how much is a sustainable change "will be a challenge for us," he said.

Kaplan said cyclical pressures are built into inflation expectations, though input costs are going up and some companies are considering raising prices. However, structural pressures, such as globalization and automation are more deflationary, he said.

Besides the fact that the impact of monetary policy always lags, the addition of an unusual amount of fiscal stimulus, in the form of tax cuts and deficit spending, so late in the economic cycle makes it hard to judge whether there's a "sustainable growth capacity in this economy," Kaplan said.

The answer to that may be clearer by the start of next year as the impact of the fiscal stimulus starts to fade, he added.

Kaplan is due to be a voting member of the Federal Open Market Committee in 2019.

Bonds and trade

On other issues, Kaplan cautioned against over-reading the bond market, despite a recent spike in long-term yields.

"There's a historic amount of global liquidity, in pension funds and central banks, looking to buy the longer end of the curve," he said.

While short-term Treasurys have responded to previous hikes in the Fed funds rate, until recently, the 10-year Treasury yield did not respond in kind, leading to speculation of a potential economic slowdown.

"The long end of the curve is telling me that prospects for future growth are somewhat sluggish or uncertain," Kaplan said.

Kaplan also said he was glad that the U.S. had renegotiated the North American Free Trade Agreement now known as the U.S.-Mexico-Canada Agreement with both Mexico and Canada, especially as Texas is the country's largest exporting state.

"We should be shoring up North America and thinking of it as a competitive hemisphere," he said. "We have been gaining share that we would otherwise lose, most likely, to China."