Former Dallas Fed President Robert Kaplan Explains Why The Central Bank Needs To Pause Rate Hikes

Former Federal Reserve Bank of Dallas President Robert Kaplan reportedly said the central bank should pause interest rate hikes as he believes the economy is in the early stages of the banking turmoil and credit issues are about to commence.

What Happened: "I do think they should pause for a few reasons,” Kaplan he told Bloomberg TV.

He added, “One is I think we are in the early stages (and) not the late stages of this banking situation. I think there has been a pretty significant change for the prospects of small and mid-sized banks. They provide most of the lending to small mid-sized businesses in the United States and we have just seen the first phase of this, which is asset liability mismatch, which is sort of the most obvious issue. But the credit issues are about to start and I think that’s why you’re seeing the reaction in the markets."

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Kaplan pointed out that another issue he would consider is from a risk management point of view and said it’s more important to be able to sustain the current rate for an extended period of time — longer than what the market thinks.

"If I were at the Fed, I would call out that we need a whole of government approach to fight inflation. Right now the Fed is saying we have got this, we can solve it. I don’t think that’s the case. I think you need fiscal restraint. I think you probably need to look at other policies that are outside the Fed and so I would pause here," Kaplan said.

Market Consensus: According to the CME FedWatch Tool, traders are factoring-in an 89% probability of a 25 basis points hike this meet. However, the market still appears to be unsure whether this would be the last rate hike of the cycle or whether the Fed would need to continue raising rates.

"I would prefer to do what’s called the hawkish pause — not raise but signal that we’re in a tightening stance because I actually think the banking situation may well be more serious than we currently understand. And I’d like to turn over a few more cards rather than regret not doing that three months from now," Kaplan said.

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