Dallas Fed chief Kaplan says there's a chance unemployment will drop below 4% and overshoot full employment

  • Dallas Fed President Robert Kaplan said the central bank ought to increase interest rates at least three times in 2018.
  • He also raised his projection for economic growth but said rate hikes are central to making sure that doesn't get out of hand.
Robert Kaplan, president of the U.S. Federal Reserve Bank of Dallas
Hailey Lee | CNBC
Robert Kaplan, president of the U.S. Federal Reserve Bank of Dallas

The unemployment rate in the U.S. is on its way to below 4 percent, a level that Dallas Fed President Robert Kaplan believes is an "overshoot" of full employment and a potential danger sign for the economy.

Consequently, he thinks the central bank ought to keep raising rates, at least three times this year, as a way to stop the economy from overheating.

"I have more conviction that we're going to get down into the 3s in terms of headline unemployment. We're going to overshoot full employment," Kaplan said CNBC's "Squawk Box" in a live interview.

"The history of overshooting full employment in this country has not been a happy one," he added. "Normally, what happens is you get an overheating, the Fed has to play catch up, and what happens then is you tend to often have a recession."

Kaplan is a nonvoting member on the Fed's policy-setting Federal Open Market Committee.

He said he has increased his estimate for economic growth this year and now sees GDP growing at up to 2.75 percent, a forecast that mirrors one that New York Fed President William Dudley made Thursday.

However, he sees the Fed playing a central role in making sure growth doesn't get out of hand.

"In my view, the best way to prolong this expansion is for us to move now in a gradual way, but to continue to remove accommodation, and I think that gives us the best chance to extend this expansion," he said.

Get the market reaction here.

This is breaking news. Please check back for updates.