Robert Kaplan: Interest Rate Hikes and Balance Sheet Reduction
Dallas Fed President Robert Kaplan weighed in on the rate hike storyline Thursday, endorsing the "three rate rises" view. He also qualified it, saying that if the economy outperforms, more than three is possible; and if it is weaker, less than three is possible. Thanks Bob.
He also stated that he was paying particular attention to price inflation trends. It's going the right direction, in his view (prices are rising), but unfortunately there are factors such as "technology-enabled disruption of business [that is] exerting downward pressure" (Reuters). This is unfortunate, of course, because rising prices are desirable and economic advancement challenges their efforts. Sarcasm aside, it is in statements like these that we get a peak into the anti-consumer mindset brought forth by the world's most eminent economists.
Beyond the tired rate hike issue, there is of course the new balance sheet theme. Kaplan informs: "As soon as later this year or maybe early next year, we should begin the process of letting the balance sheet roll off." The balance sheet has grown over 400% since the financial crisis, and now stands at $4.5 trillion compared to the $800 billion level where it stood in 2007. Yes, from the Fed's inception in 1913 to 2007 –almost a hundred years– it racked up an $800b balance sheet. And yet, in the 9 years since the crisis, it launched up to $4.5t.
So how much of this can actually be scaled back? Kaplan's answer: the balance sheet "[is] going to be bigger than the $800 billion we used to run." Clearly.