February 13, 2017 / 11:04 PM / 2 years ago

Dallas Fed's Kaplan calls for gradual interest rate rise soon

NEW YORK (Reuters) - Dallas Federal Reserve Bank President Robert Kaplan on Monday said the U.S. central bank should act soon to raise rates, or risk having to abandon its plan to do so slowly.

“I believe that we should be taking steps to remove additional amounts of monetary accommodation,” Kaplan said in remarks prepared for posting to the Dallas Fed website.

“Moving sooner rather than later will make it more likely that future removals of accommodation can be done gradually —that is, reduce the likelihood that the Fed will get ‘behind the curve’ and feel the need to remove accommodation more rapidly.”

Kaplan is a voter this year on the Fed’s policy-setting panel, the FOMC, and in January joined the rest of his colleagues in deciding to keep the Fed’s target interest-rate steady in the range of 0.5 percent to 0.75 percent.

The Fed next meets in March, but economists and traders are expecting the central bank to wait until June before raising the target rate. 

Kaplan did not say when he hopes the next interest rate rise will be and also said he sees scope for further job growth without threat of overheating the economy.

But, he said, leaving rates low for too long can create distortions in investment and hiring and penalizes savers.

His call for more rate hikes comes ahead of Fed Chair Janet Yellen’s testimony Tuesday to Congress, and it is unclear if his view reflects growing sentiment among policymakers for a rate rise sooner than later. Kaplan has in the past made comments in keeping with the core of the Fed leadership, including Yellen.

U.S. President Donald Trump has said that boosting the economy and jobs is a top priority, and has promised tax cuts, infrastructure spending, and regulatory rollbacks to boost economic growth.

Without referring specifically to any one Trump proposal, Kaplan urged a long-term view on any fiscal stimulus, warning against adding to the public debt just to deliver short-term economic gain, and urging that the focus be on boosting growth in the workforce and in productivity.

The Fed’s current target for short-term rates is well below the 3.0 percent that most Fed officials see as the long-term normal for interest rates.

In addition, the Fed’s massive balance sheet, acquired over years of bond-buying designed to further stimulate growth and hiring, continues to keep long-run borrowing costs low. Kaplan said the Fed should start discussing how to reduce its portfolio once it makes further progress on raising rates.

Reporting by Ann Saphir; editing by Clive McKeef

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