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In the following essay, Dallas Fed President Rob Kaplan (who is not a voting member of the Federal Open Market Committee, or “FOMC”, until 2020), gives you an “insider’s view” as to how one of the current Fed presidents thinks about if/when/how much to raise the Fed Funds rate.

The essay explains why various Fed presidents and voting members of the FOMC focus on concepts such as the “neutral Fed Funds rate” (i.e. the rate at which the Fed’s dual mandate of maintaining full employment and price stability (i.e. roughly a 2% inflation rate) is achieved while neither accommodating nor restricting U.S. economic growth).

The essay also provides perspective on why long-term global government interest rates remain well below their average levels over the past 150 years.

Note that our practice at First Republic Investment Management is to typically refer to the Fed Chairman’s comments, as these carry more weight in the FOMC and the marketplace. Therefore, Rob Kaplan’s comments may not be an indicator of potential Fed policy, but they provide insight into how academic concepts influence the actions ultimately taken by FOMC members.

Alan Zafran, Senior Managing Director and Wealth Manager of First Republic Private Wealth Management, summarizes the key takeaways of the essay as:

  • The current Fed Funds rate range is 2.00% – 2.25%.
  • According to Rob Kaplan, the Federal Reserve will likely continue to gradually and patiently raise the Fed Funds rate until it reaches the range of a “neutral stance” or the “neutral Fed Funds rate” (i.e. the rate at which the Fed’s dual mandate of maintaining full employment and price stability (i.e. roughly a 2% inflation rate) is achieved while neither accommodating nor restricting U.S. economic growth.
  • In assessing what is the “neutral Fed Funds rate” (which is an uncertain and imprecise exercise), Dallas Fed President Rob Kaplan prefers to focus on measures of the neutral rate that de-emphasize the impact of more volatile, shorter-term transitory factors (such as the impact of a tax cut) and that emphasize indicators reflecting the sustainable (medium-term and longer-term) growth potential for the U.S. economy (such as the rate of labor force growth and the rate of productivity growth amongst the labor force).
  • In September, the various Federal Open Market Committee (“FOMC”) members submitted their best judgment of the “longer-run” Fed Funds rate to be in a range of 2.5% to 3.5% with the median estimate at 3.0%.
  • Dallas Fed President Rob Kaplan’s estimate of the “longer-run” Fed Funds rate is modestly below the estimates made by his FOMC colleagues (he did not specify a specific rate). His suggested rate path for 2019 is also modestly below the 3.00% – 3.25% median of the ranges suggested by his fellow FOMC participants.
  • Rob Kaplan argues that FOMC members see a longer-run limit as to how many more times (3 to 5 more increases of 0.25%) that the Fed Funds rate can rise before it would restrict U.S economic growth.
  • Rob Kaplan highlights that a substantial amount of global liquidity and demand for safe assets, along with more sluggish expectations for future economic growth in the U.S. and globally, helps to explain why long-term global government interest rates remain well below their average levels over the past 150 years.

READ THE ESSAY >