What's the hurry?
Federal Reserve officials, led by Chairman Jerome Powell, have been sending signals recently that they're open to cutting U.S. interest rates in July to prevent a steep slowdown in the economy. Last week, one member of the central bank's monetary-policy committee even voted to go ahead and cut rates now.
But Robert Kaplan, president of the the Federal Reserve Bank of Dallas, said he thinks interest rates are right around "neutral" -- neither speeding up the economy, nor slowing it down. And that's the right stance at the moment, especially absent imminent signs that the U.S. is tipping into a recession.
"I believe it would be wise to take additional time and allow events to unfold as we consider whether it is appropriate to make changes to the stance of U.S. monetary policy," Kaplan wrote.
Based on trading in futures markets, investors see it as a near certainty the Fed's monetary-policy committee will cut interest rates by at least 0.25 percentage point at its next meeting, scheduled for late July.
Kaplan's comments show that the case isn't so clear cut.
The Fed committee voted last week to hold the official U.S. interest rate at its current level in a range of 2.25% to 2.5%. One member of the panel, Federal Reserve Bank of St. Louis President James Bullard, went so far as to dissent from the majority decision and vote for a reduction, a form of "insurance" against the "elevated downside risks" to the economy.
President Donald Trump, whose intensifying trade war with China is the primary threat to the U.S. growth, according to most Wall Street economists, has publicly lambasted Powell for raising rates too far, too fast -- and more recently for waiting too long to cut them.
Kaplan isn't currently a voting member of the monetary-policy committee, but like other heads of the central bank's regional branches he regularly attends and participates in the meetings. Kaplan's forecasts are included in a closely monitored chart published every month or two by the Fed known as the "dot plot," which is intended to give investors and the general public an indication of where top officials see interest rates going in the coming months and years.
Kaplan is scheduled to rotate onto the committee as a voting member in 2020. So his views aren't irrelevant.
According to his essay, published late Monday, the Dallas Fed's top economists don't see a recession unfolding anytime soon. They project a 2% growth rate for 2019, which while down from about 3% in 2018 would still be considered "solid," Kaplan wrote.
The U.S. stock market, based on the Standard & Poor's 500 Index, is hitting new record highs. And yields on 10-year U.S. Treasury notes are right around 2%, low by historical standards.
Fed officials have fretted over a U.S. inflation rate that has stayed stubbornly below the central bank's 2% target. But Kaplan said his economists have crunched the numbers, stripping out some data, and on that basis see consumer prices increasing right on pace by the end of this year.
The job market is strong, Kaplan wrote. Indeed, the U.S. unemployment rate, now at at 3.6%, is at its lowest in a half-century. According to Kaplan, the labor market's strength is already "past" the level that Kaplan would consider "full employment."
Under traditional economic theory, one of the primary reasons central banks cut rates is when joblessness jumps -- as usually happens in a recession. That certainly isn't the case now.
And there's a worry, Kaplan wrote, that lower interest rates would just encourage households and businesses to borrow more -- potentially making an eventual downturn even more painful, given the likelihood of elevated loan defaults that could cascade through the financial system.
"Monetary accommodation is not 'free,'" Kaplan wrote. "I am concerned that adding monetary stimulus, at this juncture, would contribute to a build-up of excesses and imbalances in the economy, which may ultimately prove to be difficult and painful to manage."
Low interest rates in the early 2000s have been cited as one contributing factor to the financial crisis of 2008, which triggered the last recession.
What's the rush to see that happen again?