Robert S. Kaplan

It will likely be appropriate that U.S. monetary policy remain accommodative for some time. Moreover, a lower-than-usual federal funds rate may well be needed to achieve any given desired level of accommodation. Accordingly, it is probable that the return to “normal” interest rates will be gradual. As a business manager or as an investor, I think these are key messages I would be taking from our FOMC statements.

I believe that continuing along the path of monetary policy normalization is important. There are various costs to maintaining excessive accommodation for too long—particularly in terms of potential distortions in investment, inventory and hiring decisions, which may need to be (painfully) unwound when policy normalizes. My experience is that these imbalances are sometimes easier to recognize in hindsight.

In thinking about these questions, we’re sensitive to the fact that monetary policy affects the economy with a lag. As consequence, if we delay further normalization until we actually see evidence of excessive accommodation, there is a risk that we will have waited too long.

Dallas Morning News: What are the big challenges you’re facing today?

Kaplan: We’ve worked our way out of the great recession, and people might have wrongly thought, “OK, whew, that’s over.” I think the effort these next several years will be as or more tricky and challenging as the last five years. The reason is because the world is a lot different. Globalization, an aging population, deleveraging, increasing rates of disruption.

“There is no predetermined path, we are going to be agnostic about this, we are going to be data-dependent and I need to see more information,” Kaplan said Friday in an interview at Bloomberg headquarters in New York. “I wouldn’t even speculate on what the next move is.”

We dropped the reference to balance on the risks -- that was deliberate -- which should send a signal that we are assessing non-U.S. economic conditions, global financial conditions and the impact of both of those on underlying U.S. economic conditions

"This is a time for patience and analysis, and really assessing data, because there has been some slowing," Robert Kaplan told reporters after speaking before the Real Estate Council in Dallas. "Certainly financial conditions have tightened, and we know that non-U.S. growth is weakening, and I have got to take that into account as a policymaker."

It wouldn’t be surprising to see in my [Summary of Economic Projections] submission some slowing, some change in the path [of future rate hikes]. You’ll see some change.

My own view is that overcapacity in non-U.S. economies must be considered along with domestic labor slack in assessing the implications of a given U.S. unemployment rate. In an increasingly globalized world, U.S. companies assess their employment decisions in a global context. As a result, I believe that the headline rate which constitutes “full employment” will likely be lower than the level to which we have historically been accustomed.

While I believe that excessive accommodation carries a cost in terms of distortions and imbalances in hiring, asset allocation and investment decisions, I also believe that, at this juncture, the Fed needs to show patience in decisions to remove accommodation. Again, this is particularly true in light of key global secular trends as well as recent developments relating to slowing global economic growth and tightening financial conditions.

I believe that the Fed should avoid having a predetermined mindset regarding the path of policy. This path should be driven by our ongoing analyses of cyclical as well as secular trends.

I think it makes sense to emphasize that, at this juncture, monetary policy remains accommodative; although I would note again that policy is somewhat less accommodative than it was on January 1 in light of tightening global financial conditions.

In comments to reporters Kaplan declined to rule out a rate increase at the Fed's next meeting on April 26-27.

"I would make the point generally, I think it is a good practice to assume that all eight Fed meetings are live," he said.

Mr. Kaplan said the feedback loop between Fed policy and moves in foreign-exchange markets was one reason “normalization” would be very challenging for the central bank. The best way for the Fed to approach “normalization” would be gradually and patiently, he said.

“There is a point at which I will be advocating to take the next step, but it's not now, by the way.”

"We'll know soon enough. We're not going to know by April though," he said, arguing that either the jobs figures in the quarter will be revised lower or the gross domestic product (GDP) growth estimates will be revised higher, from less than 1 percent now.

Asked whether tightening policy at a June 14-15 meeting is an "open question", he agreed. "I wouldn't be moving today if you ask me," Kaplan said. "But I'm certainly very open-minded to make a judgment in advance of June and I will."

I think too big to fail is something we need to watch, but I think we have made excellent progress over the last seven or eight years in deleveraging the banks, making them more liquid and reducing the interconnectedness..I think the market might, over the next few years, take its own actions with companies to make these banks smaller, but I think, of the issues I see out there that are systemic, breaking up the big banks is not high on my list.

The move in December I think was the right move, but I think we are going to have to be slow and patient – doesn't mean standing still – and I think we will make another move sometime in the not too distant future if GDP recovers in the way I expect. But I think people should expect it is going to be a slow, patient, gradual normalization. And so, no, I don't think December is a mistake.

“It’ll be a factor,” Kaplan said Friday about the U.K.’s approaching vote on whether to exit the European Union. If the result is uncertain heading into the June 23 referendum, that could roil currency and bond markets and “create some instability”

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“I’m going to have to make an assessment on June 15th what the likelihood is,” said Kaplan, who doesn’t vote this year on the policy-setting Federal Open Market Committee. “Right now it’s unclear, and if it’s still unclear on June 15 it is going to be a factor.”

Kaplan said he’d be looking for continued progress on the Fed’s dual mandate for price stability and full employment to support hiking next month. “I just want to see continued progress,” he told Kathleen Hays in an interview on Bloomberg Radio. “What I don’t want to see is deterioration in either of those measures. That would give me pause.”

"If economic data keeps going the way it is, I've said I will advocate for an increase in the near future," Kaplan told reporters after a public appearance here. "That may not be June or July, My approach is take one meeting at a time."

Kaplan added that his economic outlook, as formulated and submitted to his colleagues in March, is "consistent" with two rate hikes this year. That view puts him in agreement with the majority of his fellow policymakers.

"There's some room for the participation rate to get a little better, but we think a lot of it is demographic," he said. "So, we're not at full employment, but we're getting pretty darn close."

The official told reporters after his remarks to the conference that “I don’t comment on the number” of rate increases he thinks is likely for this year, saying forecasts that the Fed will release at the June FOMC meeting would convey that information.

It’s likely the data will have improved enough to boost rates at either the June or July central-bank policy meetings, Mr. Kaplan said.

At this stage in the economic cycle, it is our updated view that job growth of between 60,000 to 120,000 per month will be necessary to keep the unemployment rate constant, depending on changes in the labor force participation rate.

I am closely monitoring how slowing growth, high levels of overcapacity and high levels of debt to GDP in advanced economies outside the U.S. might be impacting economic conditions in the U.S. I am also closely tracking how these issues might be affecting the slope of the U.S. Treasury yield curve as well as measures of tightness in financial conditions.

In light of these challenges, I have been suggesting that removal of accommodation should be done in a gradual and patient manner, based on a realistic assessment of economic conditions. I am also very cognizant that, from a risk management point of view, our monetary policies have an asymmetrical impact at or near the zero lower bound.

Another likely reason for the decline in the neutral rate is the emergence of the U.S. as chief supplier of safe assets to the world. In an increasingly globally connected world, the search for safety and return occurs globally—meaning that low rates in one country can quickly impact interest rates in other countries. Robert Hall of Stanford University and the Hoover Institution argues that the representation of risk-averse foreign investors in U.S. financial markets has increased and that this trend has contributed to downward pressure on the neutral real rate.
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I am strongly persuaded by arguments that aging demographics in advanced economies, a decline in productivity growth and the continued emergence of the U.S. as a source of safe assets have all contributed to the decline in the neutral rate.

My colleague John Williams, president of the San Francisco Fed, along with Thomas Laubach, on the staff of the Board of Governors, has done pioneering work on the neutral rate (r*) that argues the longer-run neutral real rate depends on the economy’s potential growth rate, which varies over time, as well as other unobserved factors. As of the first quarter of 2016, the Laubach–Williams model implied a 0.2 percent neutral real rate.

Evan Koenig and Alan Armen at the Dallas Fed use movements in slack to help identify the neutral real rate. They focus on shorter-run r* and, rather than make r* a direct function of growth in potential output, Koenig and Armen draw on signals from the financial markets and changes in household wealth. They argue that wealth growth and long-term yields do a good job of picking up changes in growth prospects and capture movements in other r* determinants.

The Koenig–Armen model says that the short-run neutral real rate was negative 1.3 percent in the first quarter of 2016, about 1.5 percentage points below the latest Laubach–Williams estimate of the longer-run rate and only 15 basis points above the actual real rate. Policy was only modestly accommodative last quarter, according to Koenig–Armen.

Some observers suggest conducting a comprehensive review of regulations at the national, state and local levels. They argue that, in some cases, excessive regulation and fees might be creating undue burdens on capital investment, lending, and the formation and growth of small business. This may help to explain why business investment and small-business formation have been disappointing over the past several years.