The Federal Reserve can be patient and watch the economy without changing monetary policy for “the next several months,” according to Federal Reserve Bank of Dallas President Robert Kaplan.
“I believe it would be prudent for the Fed to exercise patience and refrain from taking further action on the federal funds rate until the economic outlook becomes somewhat clearer,” Kaplan wrote in an essay on the Dallas Fed website, released Tuesday. “I expect we will get some further clarity during the first half of 2019.”
In the essay, Kaplan said he expects inflation to “remain somewhat muted in 2019,” as “the structural forces of automation, technology-enabled disruption and globalization will continue to offset, at least in part, the cyclical pressures created by a historically tight labor market. As a result, I believe the Fed has the luxury of being patient over the next several months. Exercising patience will be critical if we are to achieve our dual mandate objectives of maximum sustainable employment and price stability.”
Besides the “good progress” made by the Fed toward achieving its dual-mandate of maximum employment and price stability, Kaplan said it has made headway “in normalizing monetary policy and in reducing the size of our balance sheet.”
The economy has been expanding for nearly a decade, meaning it’s probably “somewhat late in the business cycle,” he noted.
“I believe that the Treasury yield curve is sending cautionary signals regarding expectations for medium- and longer-term GDP growth,” Kaplan wrote. He pointed to “key structural headwinds,” including: an aging population that slows workforce growth, tamped “productivity growth due in part to lagging education and skill levels in the U.S., and” corporate and federal debt levels “that are stimulative on the way up but can create impediments to growth if debt levels need to be moderated.”
Inflation should “remain somewhat muted,” he said, adding, “I don’t expect inflation to run away from us.”
He pointed to “several cautionary signs that bear close scrutiny.” These include slowing global growth, which could spill over into the U.S. since nearly half “of S&P 500 company revenues come from outside the United States”; weakness in interest-sensitive industries in the U.S.; slowing manufacturing activity, as indicated by the latest national and regional surveys of manufacturing activity; and a decline in consumer sentiment.
