Fed's Kaplan has 'open mind' on rate cuts, watching U.S. yield curve

FILE PHOTO: Dallas Federal Reserve Bank President Robert Kaplan speaks with an attendee at an annual energy conference at the Dallas Fed headquarters in Dallas, Texas, U.S. September 7, 2018. REUTERS/Ann Saphir/File Photo

(Reuters) - Dallas Federal Reserve Bank President Robert Kaplan said on Thursday he was watching the U.S. yield curve carefully for signs the Fed may need to cut interest rates further, reiterating his view that waiting to do so until consumer spending weakens would be “a mistake.”

At the same time, he said in an essay, “it is my intention to take some time to carefully monitor economic developments” now that the Fed has cut rates twice this year.

Reducing borrowing costs too much, he warned, could cause imbalances and excesses, and if trade tensions that have slowed global growth and U.S. manufacturing ease, the downside risks to the U.S. economy would also be reduced.

“I intend to avoid being rigid or predetermined from here, and plan to remain highly vigilant and keep an open mind as to whether further action on the federal funds rate is appropriate,” Kaplan said.

With just under three weeks until the U.S. central bank’s next policy-setting meeting, investors are keen for any clues about whether the divided Fed that delivered interest rate cuts in July and September will reduce rates once again.

Kaplan’s remarks on Thursday gave little firm guidance on that score, but suggested he will take a strong signal from financial markets.

Parts of the U.S. yield curve are now negative, with long-term yields below short term ones, and the Fed’s policy rate, now targeted at between 1.75% and 2.00%, is higher than the yield on 10-year U.S. Treasuries. That was the case before the Fed lowered rates in both July and September, when Kaplan supported rate cuts in part because he felt the yield curve suggested policy was too tight.

“Moves in U.S. market-determined rates are consistent with concerns about economic weakness spreading more broadly to other parts of the U.S. economy,” Kaplan said.

Kaplan does not vote on policy this year at the U.S. central bank but does participate in regular policysetting meetings.

Reporting by Ann Saphir; Editing by Bernadette Baum