Dallas Fed President: Too Early to Tell Whether Rate Cut Will Be Warranted
24 June 2019 - 8:29PM
Dow Jones News
By Nick Timiraos
Federal Reserve Bank of Dallas President Robert Kaplan said it
is too soon to say whether the Fed will need to reduce interest
rates in coming months due to rising uncertainty over trade
tensions and weaker global growth.
"The question is whether trade and global growth uncertainties
are likely to persist in a manner that leads to a material
deterioration in the outlook for U.S. economic growth," said Mr.
Kaplan in an essay published Monday afternoon. "At this stage, I
believe it is too early to make a judgment on this question."
Mr. Kaplan's essay indicates he supported last week's decision
by the Fed's rate-setting committee to hold its benchmark rate
steady in a range between 2.25% and 2.5%. Nearly half of officials
indicated they thought lower rates would be needed by year's end,
in projections released after the meeting.
Nine of 10 voting members of the Federal Open Market Committee
approved the rate decision last week, with St. Louis Fed President
James Bullard dissenting in favor of lower rates. On Friday,
Minneapolis Fed President Neel Kashkari said he would have voted to
cut the benchmark rate last week by 0.5 percentage point.
Mr. Kashkari and Mr. Kaplan aren't voting members this year.
Trade tensions between the U.S. and China and the U.S. and
Mexico escalated in May. While the U.S. suspended potential tariffs
on Mexico, the prospect for any resolution with China hangs for now
on the outcome of a meeting later this week between President Trump
and Chinese President Xi Jinping.
Because the trade-policy outlook has darkened suddenly, Mr.
Kaplan said, "it would be wise to allow events to unfold a bit more
before making judgments regarding the stance of monetary
policy."
The Dallas Fed leader suggested that any move toward lower
interest rates would require the central bank to lean more heavily
on stronger regulation to guard against potential excesses from
building in the economy, particularly with respect to fueling more
leverage in the corporate sector. With businesses less able to pass
higher prices on to their customers, "debt-financed activity
becomes harder to resist," he wrote.
Business debt that is used to buy back shares or finance
corporate acquisitions can help boost earnings during good times,
but could hurt balance sheets during downturns. "This is just one
example of the type of excess that may seem innocuous when times
are good, but can become more troublesome in a downturn," he
said.
As a result, Mr. Kaplan said it was important for the central
bank to maintain stronger capital requirements and stress testing
for banks, and for regulators to watch nonbank financial companies
carefully. Tougher oversight "should provide more flexibility for
monetary policy to deal primarily with economic conditions," he
wrote.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
June 24, 2019 15:14 ET (19:14 GMT)
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