Fed's Kaplan Says FOMC Shouldn't Overread Market Expectations

(Bloomberg) -- Federal Reserve Bank of Dallas President Robert Kaplan reiterated his view that policy makers should raise interest rates “sooner rather than later” and without paying excessive attention to market expectations.

“I would like to be aware of what’s going on in the market, but I don’t want to overread or overreact to it,” Kaplan told reporters following a speaking engagement Monday in Norman, Oklahoma. “Market probabilities can change very rapidly,” he said.

Illustrating that point, the probability that investors see for a rate hike at the Fed’s March 14-15 meeting on Monday rose to 50 percent, based on pricing in federal funds futures contracts, from 34 percent just five days ago.

Kaplan repeated his view that he would prefer the Fed to move “sooner rather than later,” but without explicitly calling for a rate increase next month. “We want to guard against a situation where we get behind the curve” on inflation, he said.

Kaplan said the Fed has several communication tools available to signal to investors that a rate hike wouldn’t represent a change in its plans to raise borrowing costs “gradually and patiently.”

In addition to the usual policy statement following its March meeting, the Fed will also publish a new set of quarterly economic forecasts, including the so-called dot-plot that illustrates the path of rates under the median projection from FOMC members. Fed Chair Janet Yellen is also scheduled to give a speech on her economic outlook this Friday in Chicago.

Kaplan, a former Goldman Sachs banker who votes on monetary policy for the first time this year, expects the U.S. economy to grow by 2.25 percent in 2017. He said he continues to hear reports of brightening sentiment from businesses in his Fed district, but has yet to see that result in “meaningfully improved business activity.”

To contact the reporter on this story: Christopher Condon in Washington at ccondon4@bloomberg.net.

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Randall Woods, Scott Lanman