Bloomberg News/Landov
The Federal Reserve should take no further action on interest rates for now, in order to gauge the health of the economy and get a better sense of any message being sent by weaker financial markets, said Dallas Fed President Robert Kaplan, on Thursday.
“We shouldn’t be taking further action until some of these uncertainties resolve themselves, and I think that could take several months,” Kaplan said in an interview on Bloomberg Television.
The Fed can afford to be patient because inflation “is not running away from us,” he said.
Kaplan is not a voting member of the Fed’s interest-rate committee this year, but he is influential as a member of the central bank’s subcommittee on communications with markets.
The Fed has penciled in two rate hikes in 2019. With the recent sell-off in stocks
SPX, -1.76%
investors now think the next Fed move will be to cut interest rates.
Read: Why Wall Street might be right about the next Fed move
Asked if the markets “know something the Fed hasn’t seen,” Kaplan replied that it was “critical in the job I’m in, that you pay very close attention to what the markets are saying.”
Some market forces can spill over and cause economic growth to slow, he said. This may already be happening, he added.
The Dallas Fed president said the weakness in financial markets is likely reflecting three big issues: a deceleration in global growth, weakness in interest-sensitive sectors and tightness in financial markets in the form of widening credit spreads.
“It is going to take some time to see the depth and breadth of those three issues. We should not take any further actions until these issues are resolved for better or worse,” he said.
The Fed should also be “very open” to possibly slowing down the pace of its balance sheet runoff, he said.
“I’m not at that point [of advocating any change in balance sheet runoff] but I am watching it very, very carefully,” he said.
The Fed is now allowing as much as $50 billion in maturing securities to roll off its balance sheet every month. Some traders are concerned this program, known as quantitative tightening, is drying up liquidity.
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.
Source : MTV
