The Federal Reserve should not take any action on rates for the first half of this year given uncertainties about the economic prospects, the Dallas Fed chief has said.
Robert Kaplan played down the significance of Friday’s weak payrolls data in an interview with the Financial Times, saying he expected the number to be revised and that the jobs market remains tight. But he added there was a “decent-size list of uncertainties” which argued in favour of the Fed’s patient approach to rates.
“I don’t believe we should be taking any action at the Fed at least for the first couple of quarters of 2019,” said Mr Kaplan. “I don’t take today’s jobs number as necessarily that indicative, but I do think the economy is slowing.”
Data from the labor department showed on Friday that non-farm payrolls rose 20,000 in February, the weakest gain in 17 months. The figure badly missed the median forecast of 180,000 and marks a sharp slowdown from the 311,000 jobs added in January.
Mr Kaplan said it would not be surprising to see a slowdown in job creation, given difficulties companies may be experiencing finding workers in a tight labour market. But he cautioned against putting undue weight on one month’s number, pointing instead to three- and six-month averages for jobs growth as well as strong wage numbers.
“All I take from today’s report is the labour market is tight,” he said. “When you look at three- to six-month averages I do believe over the next three to six months you are going to see likely jobs growth slowing, but I would not over-react to any one number.”
The Fed in January shelved its rate-raising campaign in response to a period of market turbulence and tepid inflation, alongside signs of weakening growth abroad. The central bank meets to set rates on March 19-20 and is expected to keep borrowing costs unchanged while setting out a road map towards the end of its balance sheet reduction programme.
Mr Kaplan said the Dallas Fed is currently expecting the US economy to slow to around 2 per cent growth this year, in part because of policy “uncertainties”. He said he was closely watching recent earnings reports, which pointed to a lack of pricing power and some margin erosion for companies.
This would mean that even if there was some firming of inflation ahead, “I still don’t expect inflation to run away from us,” he said. This is “because of the powerful forces of technology-enabled disruption and globalization, which are having the effect of limiting profoundly the pricing power of many businesses and many industries.”
Despite weaker retail spending data for December, Mr Kaplan said the household sector were for the time being “in solid shape”. However he added: “I am concerned as the year goes on if the corporate sector slows down, does that eventually . . . if it goes too far, affect not only capex but hiring plans, but we have not seen that yet.”
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