(Bloomberg) -- Federal Reserve Bank of Dallas President Robert Kaplan said the U.S. central bank should put interest rates on hold as it waits to see how uncertainties about global growth, weakness in interest-sensitive industries and tighter financial conditions play out.
“We should not take any further action on interest rates until these issues are resolved, for better, for worse,” Kaplan told Bloomberg’s Michael McKee in a television interview on Thursday. “So I would be an advocate of taking no action and -- for example -- in the first couple of quarters this year, if you asked me my base case, my base case would be take no action at all.”
Kaplan, who next votes on policy in 2020, also indicated a willingness to be open-minded about adjusting the Fed’s balance-sheet runoff if needed -- something some market commentators have been calling for but the central bank has resisted to date.
The Dallas Fed chief often says that he watches markets carefully. Stocks experienced the worst December rout since the Depression as the threat of higher interest rates, a trade war with China and slowing growth abroad stirred doubt in investors’ minds. Financial conditions have tightened amid recent volatility, and both U.S. confidence and worldwide manufacturing gauges are weakening.
“There’s three big issues that I see reflected in the markets that are consistent with what I’m seeing in the economy and discussions with contacts,” Kaplan said, noting decelerating global growth, weakness in interest-sensitive and economically-sensitive industries, and tighter financial conditions.
“I think those three issues -- I’m sure -- are affecting the markets, but they’re also affecting my thinking about monetary policy. It’s going to take some time so see the depth and breadth of those three issues.”
Balance Sheet
Kaplan also broke with his boss, Fed Chair Jerome Powell, in describing his views about the Fed’s balance-sheet plan. While Powell has said on Dec. 19 that the process is working well and he doesn’t “see us changing” it, Kaplan said that the Fed should be “very open if necessary” to making adjustments.
“There are a number of things we could do in terms of caps or the pacing -- but I’m not there yet, and I don’t even want to speculate on it, other than to say that we’re watching it very, very carefully.”
Kaplan said he still thinks the Fed’s benchmark policy rate, which it raised last month by a quarter percentage point to a target range of 2.25 percent to 2.5 percent, remains "very modestly” accommodating of economic growth.
“What we do in 2019 will turn out to be more significant than whether 2.25 to 2.5 is too far,” he said. Fed critics, including President Donald Trump, urged it not to hike last month.
The median forecast of Fed officials updated at their Dec. 18-19 meeting projected two rate increases in 2019, down from three at their September meeting. The Fed is trying to balance the risk that very-low unemployment spurs higher inflation with the many risks that cloud the horizon.
Kaplan said inflation “is not running away from us,” and while the question of a rate cut had not entered his mind, he does favor patience in this environment.
“Some of these market forces, including financial conditions, can spill over and tighten the economy and cause growth to slow and it’s critical that we are very attuned to it,” he said, noting that yields on two-year Treasury notes have slipped below one-year yields, suggesting that investors have an outlook for "very sluggish" growth in 2020.
“This is a very critical time,” he said. “Patience is a critical tool we should be using during this period. We can get this right.”
(Updates with additional comments from the eighth paragraph.)