Another two to three interest rate increases from the Federal Reserve will likely put US borrowing costs in “neutral” territory where it is neither stimulating nor restricting economic growth, Dallas Federal Reserve President Robert Kaplan said on Friday.
At an event sponsored by the Manhattan Institute, Kaplan said he has not decided yet whether the Fed would need to raise rates above this neutral level.
Against solid economic fundamentals, Kaplan said current Fed policy remains “modestly” accommodative. It may achieve a “neutral” level with two to three quarter-point hikes toward 3.0 per cent by June 2019.
Kaplan’s comments came after the US central bank on Wednesday released minutes on its September 25-26 policy meeting where policy-makers agreed to raise key short-term interest rates for a third time in 2018 as the economy has been expanding at a faster pace due to the tax cuts enacted last December.
“The Fed is basically meeting its dual mandate,” Kaplan said, referring to US unemployment hitting its lowest in almost 49 years in September and inflation near its 2 per cent goal.
Kaplan will be a voting member of the Federal Open Market Committee, the central bank’s policy -setting group, in 2020. His view is seen in step with Fed Chairman Jerome Powell’s.
Powell said earlier this month the US economy can expand for “quite some time” and the Fed may raise interest rates past “neutral.”
According to Reuters news agency, Kaplan expects economic growth to run about 3.0 per cent in 2018 and the jobless rate, currently at 3.7 per cent, to fall further.
While the economy will likely cool from current levels, he said he did not expect a US recession anytime soon due to a strong consumer sector, which accounts for nearly 70 per cent of overall economic activity.
Kaplan voiced concerns about challenges the economy faces including an aging workforce, a shrinking pool of skilled labour and geopolitical uncertainties.