Fed’s Kaplan says rate hikes should pause

The Federal Reserve should halt its interest-rate hikes until it gets a better idea of where the economy is headed, the president of the Dallas Fed said Thursday.

Dallas Fed President Robert Kaplan told Bloomberg that slowing global growth, weakness in interest-rate-sensitive industries and tightening financial conditions – including a steep stock-market decline – mean that the central bank should hold off on further increases for now.

“I think those three issues are affecting the market, but they’re also affecting my thinking about monetary policy,” Kaplan said. “It’s gonna take some time to see the depth and breadth of those three issues.”

The Fed hiked rates four times last year, with the last hike coming just two weeks ago. The December rate increase came in spite of indications that the US economy is weakening and a slowing stock market. The Fed indicated that two more increases are likely in 2019 – but market analysts don’t think that will happen, according to a CNBC report. Markets are pricing in less than a 10% chance of a hike before the end of the year.

“My own view is we shouldn’t take any further action on interest rates until these issues are resolved for better or for worse,” Kaplan told Bloomberg. “So I would be an advocate of taking no action, for example, in the first couple of quarters of this year.”

Kaplan is a nonvoting member of the Federal Open Market Committee, the central bank’s policymaking body.

The Dallas Fed projects gross domestic product will slow to a “little below” a 2% annual rate this year.

Kaplan said the Fed projected some slowing as the economy entered 2019 but the actual slowdown seen has been “a little greater than we expected.”

The U.S. economy will not be immune from weaker growth in China, he said.
“It is critical we take the right action at the Fed during this period. This is a very critical time. We need to be very vigilant and I think patience is a critical tool we should be using during this period,” he said.