2-7-18 9:01 AM EST | Email Article
By Tom Fairless and Todd Buell 

FRANKFURT -- The recent correction in financial markets is healthy and is unlikely to hurt financial conditions or the broader U.S. economy, the head of the Federal Reserve Bank of Dallas said Wednesday.

"I think it's healthy that there is some correction, a little more volatility in markets...can be a healthy thing," said Dallas Fed President Robert Kaplan in a discussion at a university in Germany's financial capital.

The Dow Jones Industrial Average had a volatile session Tuesday, as financial markets attempted to regain their footing a day after the index suffered its biggest-ever daily point plunge on Monday.

Asked if the volatility had implications for financial conditions or the health of the underlying economy, Mr. Kaplan said, "at this point, I don't think so."

Traders have grown more worried in recent days about rising inflation that could cause the Federal Reserve to raise interest rates more vigorously, especially after data published on Friday showed U.S. wage growth accelerating to 2.9% on the year.

The Fed has been gradually nudging up interest rates in recent years, removing monetary stimulus as the unemployment rate has fallen to just 4.1%. A statement released after the Fed's latest meeting on Jan. 31 offered nothing to dispel market expectations that the central bank would deliver its next rate increase in March.

Fed officials are hoping to keep rates low enough to encourage inflation to firm up a bit without surging out of control, amid a tight labor market and solid economic growth. Inflation measured by Fed's preferred measure rose 1.7% in December.

Mr. Kaplan suggested low interest rates might be more effective at reducing unemployment than pushing up inflation, and might create "other excesses and imbalances."

"That balance tells me [it is] wise to remove accommodation in a patient and gradual manner," he said, referring to the need to gradually raise interest rates. Mr. Kaplan doesn't have a vote on monetary policy this year.

The neutral interest rate, at which policy is neither supportive nor restrictive, "is likely to be lower than what we're accustomed to historically, and I think that's another thing that probably should be emphasized," he added.

Turning to the recent U.S. tax reform, Mr. Kaplan said that while elements of the legislation would help support sustainable economic growth, the tax cuts in particular would ultimately lead to higher government debt. That will give the government less capacity to support the economy in the future, he said.

Write to Tom Fairless at tom.fairless@wsj.com and Todd Buell at todd.buell@wsj.com


(END) Dow Jones Newswires

February 07, 2018 09:01 ET (14:01 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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