May 3, 2019 / 11:53 PM / 7 months ago

Fed's Kaplan sees need for vigilance on inflation

FILE PHOTO: Dallas Federal Reserve Bank President Robert Kaplan gestures during a news conference after of the True Economic Talks event in Mexico City, Mexico, July 14, 2017. REUTERS/Edgard Garrido

PALO ALTO, Calif. (Reuters) - Dallas Federal Reserve Bank President Robert Kaplan, a supporter of the U.S. central bank’s decision to leave interest rates on hold in the face of muted inflation, warned on Friday of the need to stay alert to the threat of a substantial surge in prices.

In an essay prepared for released at a Hoover Institution conference on monetary policy, Kaplan said he expects U.S. gross domestic product to grow at about 2.25 percent this year, a slower pace than last year but still fast enough to tighten labour markets further and modestly boost wage growth.

But Kaplan notably did not echo Fed Chairman Jerome Powell’s view earlier this week that much of the recent weakness in inflation stems from temporary factors. Powell, in comments following the close of the Fed’s two-day policy meeting, projected a return to the U.S. central bank’s 2 percent target as those factors wash out of the data.

Instead, Kaplan said that low inflation readings could simply be a byproduct of structural changes in the economy, for instance as technology companies like Amazon and Lyft deliver goods and services at lower prices, and companies seek mergers to gain market clout and economies of scale. Such a view suggests that low inflation could persist.

It could also be that as the workforce ages, the natural rate of unemployment is lower than was previously thought, so that muted inflation even at historically low levels of unemployment may not be that surprising, Kaplan said.

If that’s the case, he said, “Central bankers need to be vigilant to the possibility that there is still the potential for inflation readings to firm substantially, with a time lag, if the degree of full employment overshoot becomes more sizeable and persists for an extended period of time.”

Kaplan, who does not have a vote this year on monetary policy, did not address in his prepared remarks his view on whether the Fed will need to raise rates further.

Reporting by Ann Saphir; Editing by Leslie Adler

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