Dallas Fed’s Kaplan Anticipates Short-Term Economic Growth, Long-Term Challenges

As the Federal Reserve continues its slow and steady course to raise the federal funds rate, Federal Reserve Bank of Dallas President and CEO Robert Kaplan today said he expects to see continued GDP growth and tightening of conditions in the labor market in 2018. In an essay on economic conditions and challenges facing the U.S. economy, Kaplan noted that the Dallas Fed expects U.S. GDP growth between 2.5 and 2.75 percent, with unemployment falling from 4.1 percent to 3.6 percent by year end.

Given these conditions, he expressed support for the Fed “gradually and patiently raising the federal funds rate during 2018,” noting that “gradual and patient removals of accommodation will increase the likelihood of extending the economic expansion.” He cautioned, however, that waiting too long to remove accommodation could ultimately “increase the likelihood of recession in the U.S.”

Kaplan added that while the near-term economic outlook is generally positive, due in large part to the effects of the new tax law, long-term challenges remain. “Our view is that ‘potential’ GDP growth, the sustainable underlying growth capability of the U.S. economy, is approximately 1.75 percent. This . . . is lower than we’ve historically been accustomed due to several structural issues” including an aging population, a growing skills gap in the work force and the projected path of U.S. government debt, he said.