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The president of the Dallas Fed says central bank should pause rate hikes amid turmoil in markets

Key Points
  • Dallas Fed President Robert Kaplan said the central bank should pause on rate hikes until market and economic turmoil settles down.
  • Slowing growth, impacts on rate-sensitive industries and tightening financial conditions are driving Kaplan's view, he told Bloomberg.
Robert Kaplan, president and CEO of the Federal Reserve Bank of Dallas.
Mary Catherine Wellons | CNBC

The Federal Reserve ought to stop raising interest rates until it gets a clearer picture of where the economy is headed, Robert Kaplan, president of the central bank's Dallas district, said in an interview Thursday.

Slowing global growth, weakness in rate-sensitive industries and tightening financial conditions that have included a sharp stock market drop have indicated to Kaplan that the Fed should hit the pause button, he said in an interview with Bloomberg.

"I think those three issues are affecting the market, but they're also affecting my thinking about monetary policy," he said. "It's gonna take some time to see the depth and breadth of those three issues."

The comments come just two weeks after the Fed approved its fourth rate hike of 2018, despite a near-bear market on Wall Street and increasing indications that the U.S. economy, like the rest of the world, is showing signs of weakening after its best year since the financial crisis.

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Along with the rate hike, Fed officials collectively indicated that two more rate increases are likely this year. Markets, however, do not think that will happen and are pricing in less than a 10 percent chance of a hike before 2019 ends.

"My own view is we shouldn't take any further action on interest rates until these issues are resolved for better or for worse," Kaplan said. "So I would be an advocate of taking no action, for example, in the first couple of quarters of this year."

Kaplan is a nonvoting member of the policymaking Federal Open Market Committee this year, but still has input on the panel and will vote again in 2020.

His comments contrast somewhat with remarks he made in an October essay. Back then, he said the Fed "no longer [needs] to be stimulating the U.S. economy" and should be "gradually and patiently" moving toward a "neutral" rate that is neither stimulative nor restrictive on growth.

In addition to his comments Thursday on rates, Kaplan said the Fed may want to rethink its balance sheet reduction. In an operation that started in October 2016, the central bank has been allowing a set level of proceeds — currently at $50 billion — from its bond portfolio to run off each month. That has reduced the Fed's role in the bond market and has sparked liquidity concerns.

"I think it's critical in the job I'm in that you pay very close attention to what the markets are saying," Kaplan said.

"This is unprecedented. There's no textbook for exiting quantitative easing, and my own view is while there's a process in place, we should be very vigilant," he added. "I'm watching it very carefully and [we should] be very open if necessary to making adjustments in this balance sheet runoff if we need to. I'm not at that point yet, but I'm watching it very carefully and I think we should be very open-minded about making adjustments to that process if we need to."

Contrary to Kaplan's stance, Fed Chairman Jerome Powell said at a December news conference that he does not expect the Fed to adjust its balance sheet stance. Those comments were broadly seen as sparking another move lower in the stock market.