Fed’s Kaplan Says Watching Trade War Impact on Economy, Prices

(Bloomberg) -- Federal Reserve Bank of Dallas President Robert Kaplan says trade tensions might have a chilling effect on the U.S. and global economy, and he’s also watching for the potential effects on inflation.

Some end-markets may be jeopardized by the U.S.-China trade dispute, but “the bigger thing is logistics and supply chain arrangements,” Kaplan said Saturday during a wide-ranging discussion at the Society for Advancing Business Editing and Writing’s annual conference in Phoenix.

“It’s more likely to slow global growth” and “it’s more likely to slow U.S. growth ultimately,” but it’s also possible some of the threatened tariffs won’t be enacted, he said.

President Donald Trump last week increased duties to 25% from 10% on some $200 billion in Chinese products, and has threatened to impose tariffs on almost all imports from the world’s No. 2 economy. That would pull in consumer products like mobile phones and toys that so far haven’t been affected, as well as everything from flashlights to billiard balls.

Inflation Impact?

As for the effects of tariffs on inflation, it’s “too soon to judge, you’ll have to see the currency reaction and how businesses deal with it,” said Kaplan, who doesn’t vote on monetary policy this year. He noted that the Fed will have to examine, “is this transitory, or is this something that will be more persistent?”

Kaplan also echoed concerns that technological advances are muting inflation, which has been stubbornly below the Fed’s target. “We think that’s intensifying,” fueled by the low cost of capital, he said.

The high ratio of corporate debt to U.S. GDP is a concern, said Kaplan. While manageable for now, it “could be an amplifier” if the economy turns down.

Many leveraged loans aren’t on banks’ balance sheets and “we need to be vigilant and watch the non-bank financial sector,” Kaplan said. The Fed has less visibility into the well-being of that sector, he said.

Daily Liquidity

Kaplan also pointed to the several hundred billion dollars in high-yield debt in exchange-traded funds and other vehicles with daily liquidity, noting that there’s a mismatch between the liquidity held and the rights of holders to get high liquidity.

As to whether Trump’s criticisms of the Fed and jawboning for an interest rate cut have had “any impact on decisions around the table, the answer is ‘no,’” Kaplan said.

He also talked about the increase in government debt in recent years, and that some “people are assuming the dollar will always be the world’s reserve currency” when they dismiss concerns about the issue, Kaplan said.

“It would be a mistake to assume that will last forever,” Kaplan said. People don’t need to stop buying Treasuries, they just need to get down to market weight and the U.S. is going to spend more for its debt, he said.

Lack of workforce growth in the U.S. is also an issue, Kaplan said, particularly if immigration is reduced. And the workforce participation rate, which was 62.8% as of the April payrolls report, could fall to 61% in coming years, he said.

On the regulatory front, Kaplan said he would be “loath to do things that ease up on capital testing” for large banks. However, he said he feels differently about small and medium-sized banks, which need relief.

To contact the reporter on this story: Joanna Ossinger in Phoenix at jossinger@bloomberg.net

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Ros Krasny, Virginia Van Natta

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