MNI INTERVIEW: Fed Could Hold Rates For Some Time-Kaplan 

Federal Reserve officials appear likely to await further clarity on an economic outlook muddled by evolving trade tensions before cutting interest rates further, former Dallas Fed President Robert Kaplan told MNI. 

He expects the economy to soften but not buckle under the threat from rising tariffs and trade tensions, which this week got a reprieve in the form of a 90-day pause in trade hostilities between the United States and China. 

“If we see slowing, but not severe slowing, prices could remain sticky, and the unemployment rate may inch up but not spike up. In that scenario the Fed might be inclined to do nothing for some period until there is more clarity on the impacts of the structural changes that are currently underway,” Kaplan, now vice chairman of Goldman Sachs said in an interview. He spoke before the U.S.-China tariff pause was announced Monday. 

Kaplan is not surprised that the job market appears to be holding up despite the prospect of a weaker economy, he said, citing a shrinking pool of available workers due to rising immigration restrictions. The economy generated a larger-than-expected 177,000 new jobs last month while the jobless rate held steady at 4.2%.

“Businesses are less inclined to conduct layoffs right now, because the labor force appears to be tight. The lack of immigration flows and the deportation – and encouraged self-deportation – of undocumented immigrants is likely having some tightening effect on the labor force. As a result, it is possible that you could have slower growth without unemployment spiking,” he said. 

“If the unemployment rate stays stable and the labor market remains tight, it will likely have a moderating impact on the odds of a recession. Given that services are approximately 77% of the U.S. economy, it is possible that consumers could shift their buying behavior to services away from goods." (See: MNI POLICY: Fed Sees Jobs On Shakier Ground Amid Tariff Shocks)

At the same time, Kaplan does not foresee a great degree of pass-through of higher input costs to consumers at this juncture. 

“Companies will price where they can depending on how distinctive their product or service is in the market. If it’s very distinctive, companies will have some pricing power, and if it’s not distinctive they are likely going to struggle, and you could see these companies are more likely to take more of a margin hit,” he said.