Economist's Insights

Kaplan Says a “Balanced Approach” to Monetary Policy Calls for Another Rate Increase in the Near Future

Nov 27, 2017

After last week’s Fed Minutes were released, we concluded that the coming weeks and months would be telling as to what the Fed fears the most, below-target unemployment or below-target inflation. Dallas Fed President Kaplan gave his answer in a Monday essay where he wrote that in cases when the dual-mandate goals are being achieved to different degrees, the Fed “will seek to follow a ‘balanced approach’…taking into account the magnitude of the deviations and the potentially different time horizons over which” the goals may be achieved. Kaplan summarized his outlook by saying that he’s “balancing a labor market that is likely to become increasingly overheated in the months ahead with a level of inflation that is running somewhat below our 2 percent goal.” In addition to the risk that the economy “may well move materially beyond maximum sustainable employment sometime in 2018,” Kaplan also said he is monitoring potential “financial imbalances” – he singled out stock market cap to GDP, low equity volatility, corporate debt levels, government debt levels, trading volumes, and margin debt as examples – that could threaten the sustainability of the expansion if they were abruptly to unwind. The bottom line is that Kaplan believes enough “cyclical [inflation] forces are building” to support additional gradual rate increases to ward off overshooting max employment and keep from adding to financial excesses.