(Reuters) - Dallas Federal Reserve Bank President Robert Kaplan on Monday made his clearest case yet for an interest-rate hike next month and more to come in 2018, saying that waiting too long to tighten policy could increase the risk of recession.
“I believe it will likely be appropriate, in the near future, to take the next step in the process of removing monetary accommodation,” Kaplan said in an essay staking out his policy views ahead of next month’s Fed meeting. “This should be done in the context of an overall strategy of removing accommodation in a gradual and patient manner.”
The Fed is widely expected to raise rates when it meets in mid-December. Kaplan, a voter this year on monetary policy, had earlier said he would be “open” to considering a rate hike. On Monday he signaled he considers the risk of an overheating labor market and possible imbalances in financial markets to outweigh the chance that inflation could continue to under-run the Fed’s 2-percent goal.
“If we wait too long to see actual evidence of inflation, we may get behind the curve and have to subsequently raise rates more rapidly,” Kaplan wrote. “This type of rapid rate rise has the potential to increase the risk of recession.”
Rates hikes should instead be done in a “gradual and patient” manner, he said.
Unemployment registered 4.1 percent last month, and is expected to fall further in coming months, Kaplan said. Meanwhile he cited several examples of potential excesses in financial markets, including the value of the U.S. stock market compared with the size of the U.S. economy; the lack of any sizeable recent decline in the stock market; and rising U.S. government debt.
Reporting by Ann SaphirEditing by Chizu Nomiyama