DALLAS (Reuters) - Fiscal stimulus from tax cuts and a government spending bill are beginning to wane, and the lagged effect of a string of interest rate hikes has yet to fully impact the U.S. economy, Dallas Fed President Robert Kaplan said on Thursday, two reasons why he says he is advocating a stop to rate hikes for now.
Slowing global growth that could spill over to the U.S. economy, tighter financial conditions than six months ago, and the probability that last year’s tax cuts will not boost productivity as hoped, all contribute to his view that the U.S. economy will grow just 2 percent this year, he said.
“We would be well served and the country would be well served if we paused and were patient for some number of months and sort of get out of the way,” Kaplan said at a conference at the bank’s headquarters in Dallas.
The Fed raised its target range for short-term borrowing costs in December to 2.25 percent to 2.5 percent, and last month signaled it would leave them there for the time being as it assesses the economic outlook amid a range of downside risks. This was a stance that Kaplan has pushed for months.
Interest rates are now “in the neighborhood” of a neutral level that neither stimulates nor brakes a healthy economy, he said. And with inflation likely to remain muted as structural forces like technology that push down on prices overwhelm the cyclical upward push on inflation from a tight labor market and the power of a consumer, the Fed has the “luxury” of being patient on raising rates, he told reporters after the conference.
“I don’t think it’s a function of how strong the consumer is,” Kaplan said. “People will realize I can either pay less or I can get more, and technology is getting rid of a lot of these inefficiencies.”
Reporting by Ann Saphir; Editing by Chizu Nomiyama