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Fed’s Kaplan Says Not Sure Economy Can Avert Severe Slowdown

Catarina Saraiva and Matthew Boesler
Fed’s Kaplan Says Not Sure Economy Can Avert Severe Slowdown

(Bloomberg) -- The “jury is out” on whether the current slowdown in the U.S. economy will turn more severe amid weaker global growth and uncertainty over trade policy that’s chilling investment, according to Federal Reserve Bank of Dallas President Robert Kaplan.

“I think we’re in a fragile period in here, which is why I am glad the Fed has taken some action in July and September,” Kaplan said Thursday in an interview with Michael McKee on Bloomberg Television. “But I think this could go either way. We can avert a more severe slowdown, but I think the jury is out right now.”

U.S. growth slowed to an annualized 2% pace in the second quarter from 3.1% in the prior three months and is forecast to further moderate in the third quarter. Uncertainty stemming from trade disputes has slowed business investment, something Kaplan said he is watching carefully to see if it seeps into parts of the economy that have so far withstood the slowdown, such as the consumer.

Speaking later Thursday, Minneapolis Fed President Neel Kashkari, one of the U.S. central bank’s most ardent doves, echoed concerns about downside risks. Both he and Kaplan will next vote on the policy-setting Federal Open Market Committee in 2020.

Investors expect the Fed to cut rates by a quarter percentage point again at its Oct. 29-30 meeting in Washington following reductions in July and September. Kaplan said he will wait until right before the meeting to decide if he supports further policy easing.

“I think it’d be wise for us not to over-telegraph where we are in the cycle,” Kaplan said. “This cutting we’re doing should be limited, restrained and modest and not the start of a full-fledged cutting cycle.”

Minutes of September’s FOMC meeting released Wednesday showed a debate emerging about how far their current interest-rate cutting campaign should extend, with several policy makers arguing the Fed should clarify when policy re-calibration due to trade policy uncertainty would end.

Kaplan also said he’d rather use the central bank’s policy ammunition “when it matters most” rather than waiting for evidence that the slowdown has spread to U.S. households.

“I think moving now gives us the best chance to avoid a more severe slowing and that’s why I want to use the ammunition now even though, yes, it means we’ll have a little less ammunition for later,” he said.

Kashkari, speaking at a Yahoo Finance event in New York, said the central bank may need to cut again.

“I think likely,” Kashkari said, responding to a question about whether more accommodation would be needed. “My best estimate right now is that interest rates are roughly around neutral, maybe slightly contractionary.”

“If the downside risks have increased, then I think we should be taking measures to try to provide some support to the economy,” he said. “I’m glad that we’re easing. I’m not sure how much further we have to go, but I want to watch the data.”

The record of the September meeting, which took place after the Fed was forced to intervene to calm a cash crunch in money markets for the first time in a decade, also showed a debate about boosting bank reserves via securities purchases to ease future strains.

Balance Sheet

Kaplan said the Fed would soon make an announcement about expanding the balance sheet, echoing a statement by Jerome Powell on Tuesday, and agreed with the Fed chairman’s comment that such a move should not be viewed as a resumption of quantitative easing.

Kaplan said the Fed would only be buying Treasury bills if it decided to proceed -- which have maturities of up to 52 weeks -- if it decided to proceed, rather than securities out along the yield curve as it did during the financial crisis. That action was designed to stimulate the economy by lowering longer-term borrowing costs, whereas this step would be aimed at ensuring the Fed is able to keep the policy rate within the target range, Kaplan said.

(Updates with Neel Kashkari comments beginning in fourth paragraph.)

To contact the reporters on this story: Catarina Saraiva in Houston at;Matthew Boesler in New York at

To contact the editors responsible for this story: Margaret Collins at, Vince Golle, Alister Bull

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