Dallas Fed’s Kaplan departs from hawkish tone of Fisher era

Robert Kaplan broke from his predecessor’s inflation-hawk tradition in his first policy speech as president of the Federal Reserve Bank of Dallas, saying that monetary policy ought to remain easy for some time.

“In my view, the FOMC, in the previous two meetings, has been prudent in waiting for more data before taking policy action,” Kaplan said in remarks prepared for a speech in Houston on Wednesday. Kaplan cited ongoing external risks, including those from China, among the reasons for caution. At the same time, “accommodative policy does not necessarily mean a zero fed funds rate,” which is where it’s been held since 2008.

The tone of Kaplan’s comments mark a departure from the views of former Dallas Fed President Richard Fisher, who was an outspoken anti-inflation hawk and dissented on several occasions in favor of tighter monetary policy.

“I think we should be accomodative, but I think there’s a cost to being at zero for too long in terms of potential distortions and imbalances,” Kaplan told reporters after delivering his speech. A return to more “normal” interest rates will likely be gradual, he said.

Fed officials are weighing when to raise rates for the first time since 2006 and a majority of investors expect them to announce liftoff next month, following a solid October reading on job growth. Officials also made an explicit reference to the December meeting in their Oct. 28 FOMC statement.

The job market has been a star performer as the central bank looks to fulfill its dual mandate of maximum employment and stable inflation, while price pressures have lagged. Employers in the U.S. added 271,000 new jobs in October, the most this year, yet the committee’s preferred inflation gauge hasn’t touched its 2 percent goal since 2012.

The Dallas Fed estimates job growth of 100,000 to 150,000 a month is enough to hold the jobless rate steady, according to Kaplan. Unemployment last month fell to a seven-year low of 5 percent.

Kaplan, who has attended two FOMC meetings, was previously a professor of management practice and a senior associate dean at Harvard Business School. Before joining Harvard, he spent 22 years at Goldman Sachs and was vice chairman in charge of investment banking when he departed.

While speaking today, Kaplan also detailed the Dallas Fed’s outlook for oil prices and the energy industry, which makes up 14 percent of Texas’ gross domestic product.

“It is our view that it will not be until late 2016 or early 2017 before inventories stabilize and daily production and consumption reach some reasonable degree of balance,” Kaplan said. “We expect to see significant price swings and volatility. We also expect to see more bankruptcies, mergers and restructurings in the energy industry.”

This story was originally published November 18, 2015 at 4:01 PM with the headline "Dallas Fed’s Kaplan departs from hawkish tone of Fisher era."