By Terry Wade
HOUSTON (Reuters) – Global headwinds are undercutting the Federal Reserve’s efforts to boost the U.S. economy, making low interest rates not nearly as stimulative as they were when the rest of the world economy was growing faster, a top Fed official said on Wednesday.
A “slow, gradual, careful” approach to raising interest rates is therefore appropriate as the U.S. central bank deals with this new world of slower growth, Dallas Fed President Robert Kaplan said in a speech in Houston.
The Fed, he added, needs to calibrate monetary policy more cautiously now than it did five or six years ago in the face of China’s economic slowdown, the possible impact of Brexit on global and U.S. economic growth, and other global threats.
The Fed lifted rates in December for the first time in nearly a decade, but it has been unable to raise them this year due to disappointing domestic data and fresh setbacks on the global front.
Low rates have helped the U.S. economy make “good progress” toward the Fed’s full employment goal and slowly make progress toward the central bank’s 2 percent inflation goal, Kaplan said.
Without structural reforms or other actions beyond monetary policy, he added, the U.S. economy looks likely to be stuck in a slow-growth period that will slow the Fed’s progress in meeting its employment and inflation goals.
Echoing a concern widely held by Fed officials, Kaplan noted that estimates of the so-called neutral rate – the interest rate at which the economy is neither over- or under-stimulated – have fallen over the past decade.
That decline means the low federal funds rate is delivering a modest boost to the economy, but policy is not “wildly” accommodative, Kaplan said. He added that Fed policy should remain accommodative until the central bank reached its goals.
“Accommodation should be removed only in a slow and patient manner,” Kaplan told reporters after his public appearance.
U.S. Treasury yields have been near record lows as global investors pile into U.S. assets seen as safe. Kaplan said the low yields also reflected expectations of lower economic growth, and he forecast the U.S. economy would grow by 2 percent this year.
The Fed is “very sensitive” to the strength of the dollar even though manufacturing and exports have declined as a share of U.S. gross domestic product, he also said.
(Reporting by Terry Wade; Writing by Ann Saphir; Editing by Chizu Nomiyama and Paul Simao)