Dallas Federal Reserve President Rob Kaplan said Tuesday he sees some inflationary pressures building but said he doesn’t think there will be a sudden spike in prices.
“I don’t believe inflation is going to run away from us,” Kaplan said in a talk at the Economic Club of New York.
Kaplan said the inflation picture is a tale of “two colliding forces.” On the one hand, there is no question that “cyclical inflationary pressures are building” such as a tight labor market, trade tariffs and higher oil prices. Some industries have said they would try to raise prices.
On the other hand, structural factors like automation and globalization are still limiting the pricing power of businesses, he said. These factors are intensifying and as a result, price pressures should remain muted and give the Fed room to raise rates gradually, he said.
It will be “tricky” for the Fed if price pressures keep rising and the central bank has to decide what is sustainable and how much is transitory.
He said a gradual pace for him would be three quarter-point interest rate increases through June.
The idea is that the Fed should be raising the funds rate until it is no longer boosting growth, “understanding we have to feel our way a bit.”
He estimated that a so-called neutral rate, where rates would not be easy, is a range between 2.5% and 2.75%. At the moment, the funds rate is a range between 2% and 2.25%.
So three rate hikes through June “doesn’t seem unreasonable to me,” he said.
After that, Kaplan said he was uncertain where policy should go.
“I don’t know,” he said. “I don’t need to make that judgment yet,” he said.
“Once we get to neutral, we’ll have to assess should we go further or should we sit tight for a while and I don’t know the answer yet,” he said.
Bond yields have climbed in recent weeks. The yield on the 2-year note TMUBMUSD02Y, +0.01% has climbed to 2.89% from 2.75% a month ago, and the yield on the 10-year TMUBMUSD10Y, -0.53% has climbed to 3.22% from 2.98%.
Kaplan said he didn’t have a “clean” answer for why the 10-year Treasury yield has risen so much recently. “There are a number of conflicting forces that may explain it,” he said.
Investors are pricing in two quarter-point rate hikes between now and next June, according to the CME Group’s FedWatch tool.