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Fed's Kaplan backs view for two more rate hikes this year
MARKETWATCH 12:01 PM ET 5/22/2017
Recent soft inflation readings are likely not a new weakening trend, Dallas Fed President says

Robert Kaplan, the president of the Dallas Fed, said he wasn't worried about the strength of the economy or the outlook for inflation and said he expected the U.S. central bank to raise short-term interest rates twice more this year.

With growth registering only 0.7% annual rate in the first quarter and back-to-back soft consumer price index readings in March and April, some Fed watchers are starting to doubt the Fed's expectations of two more interest rate hikes this year. The Fed next meets June 13-14.

Read:Fed minutes may quell doubt about a June interest-rate hike (http://www.marketwatch.com/story/fed-minutes-may- quell-fresh-doubts-about-a-june-rate-hike-2017-05-19)

But in an essay published on his bank's website, Kaplan pushed back, saying he thought that growth would rebound over the remainder of the year due to stronger consumer spending and business fixed investment. He forecast a 2.25% growth rate for the entire year.

The Dallas Fed President, who is a voting member of the Fed's policy committee for the first time this year, also said he didn't want to read too much into the soft inflation readings of March and April (http://www.marketwatch.com/ story/treasury-yields-extend-reversal-from-six-week-high-2017-05-12).

"I believe that these recent readings are likely not indicative of a weakening trend," Kaplan said.

He noted that the Dallas Fed trimmed mean inflation measure, which factors out the most extreme upward and downward monthly price movements, has been on a slow upward trend, and is running at about a 1.8% annual rate through March.

This supports the forecast that headline inflation should reach, or exceed, the Fed's 2% target "in the medium term," Kaplan said.

As a result, Kaplan said two more rate hikes was "an appropriate baseline case." But he said he could be persuaded to support a faster or slower pace of rate hikes depending on the economy's performance.

The Dallas Fed President said he thinks the central bank should start to shrink its massive $4.5 trillion balance sheet "sometime later this year."

Kaplan said there are upside and downside risks to the economy from President Donald Trump's policies.

He said protectionism aimed at Mexico could hurt his district. And the Dallas Fed President noted that the Republican health-care plan and some immigration policies could dampen spending, including habits of immigrants living in the U.S.

And Dallas-based Kaplan, who pays close attention to energy markets for his central bank colleagues, said he expects oil prices to be volatile "but within a roughly stable band of the mid-$40s to the mid-$50s for the remainder of 2017."

He said his research team expects OPEC and other oil-producing nations will extend their agreements to reduce production levels.

Read:4 potential outcomes for OPEC's crucial meeting this week (http://www.marketwatch.com/story/4-potential-outcomes- for-opecs-crucial-meeting-2017-05-19)

-Greg Robb; 415-439-6400; [e-mail]


(END) Dow Jones Newswires
05-22-171201ET
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