Fed’s Kaplan Advocates Caution in Rate Hikes, Highlights Global Risks

By Elias Glenn and Lindsay Dunsmuir

BEIJING – A range of global risks that could negatively impact the United States is still apparent and warrants careful observation, according to Robert Kaplan, President of the Dallas Federal Reserve Bank.

Kaplan, alongside other Federal Reserve policymakers, has emphasized the need for renewed caution regarding further interest rate increases since the U.S. central bank raised its benchmark rate for the first time in nearly a decade last December.

"I am closely monitoring how slowing growth, high levels of overcapacity, and significant debt-to-GDP ratios in major economies outside the U.S. might be affecting economic conditions domestically," Kaplan stated during an event in Beijing.

This marks Kaplan’s second public address in a week, where he reiterated his support for a gradual and patient approach to tightening monetary policy.

One of his primary concerns is the sluggish growth in the U.S., which is compounded by an increasingly interconnected global economy.

"It’s going to take many years, possibly decades, for China to adjust to its overcapacity and high debt levels," Kaplan warned. "Sudden shocks could complicate that transition."

He underlined the importance of considering how U.S. actions could pose challenges to China’s adjustment process and noted that the strong dollar early in the year had a destabilizing effect on China.

Although not a voting member of the Fed’s policy committee this year, Kaplan participates fully in discussions and continues to assess the implications of Britain’s decision to leave the European Union. While the Brexit vote has shown little initial impact on the U.S. economy, Kaplan believes it will take time to fully understand its long-term effects.

Kaplan’s remarks align with a more cautious sentiment from other Fed officials regarding the likelihood of rate increases in the near future. He expressed reservations about adopting negative interest rates, citing potential adverse effects on financial institutions.

On Monday, New York Fed President William Dudley, a voting member of the Fed’s rate-setting committee, indicated that while it may be "premature" to dismiss a rate increase this year, the likelihood of negative economic shocks appears higher than positive ones.

Kaplan mentioned a need for consistent job growth above 80,000 to 125,000 new jobs each month to boost confidence in reducing economic slack, emphasizing that further information is necessary to understand how slower GDP growth aligns with strong employment figures.

"We need to approach the removal of economic accommodations cautiously due to global risks and imbalances," he advised.

Investors have reduced expectations for a Fed rate hike in 2016, now estimating a one in three chance of an increase at the December meeting.

The Federal Reserve projects two more rate hikes by the year’s end but has faced challenges since December due to global uncertainties and fluctuating U.S. economic data.

The Fed’s next policy meeting is scheduled for September 20 and 21.