Dallas Fed’s Kaplan is hopeful rhetoric in U.S.-China trade dispute will de-escalate

By Elias Glenn and Stella Qiu

BEIJING (Reuters) – Dallas Federal Reserve Bank President Robert Kaplan said on Tuesday he is quite hopeful that despite the recent trade skirmish between the United States and China, the rhetoric will de-escalate.

Kaplan, a non-voting member on the U.S. central bank’s rate-setting committee this year, said in a speech at Tsinghua University in Beijing that bilateral discussions on trade issues would likely move behind the scenes and won’t be done publicly, and the issues probably won’t be resolved anytime soon.

Kaplan’s comments come after Chinese President Xi Jinping pledged earlier on Tuesday to further open China’s economy and cut tariffs this year, in a speech seen as an attempt to defuse an escalating trade dispute with the United States.

Concerns about trade are legitimate issues that need to be discussed, Kaplan said.

While U.S. officials, including President Donald Trump, have recently expressed optimism that the two sides would hammer out a trade deal, Beijing in recent days has said negotiations would be impossible under “current circumstances”.

The recent tit-for-tat tariffs between China and the United States have fueled worries that it would affect global growth.

It is too soon to judge the impact of recent trade rhetoric on the U.S. economy, Kaplan said, reiterating that the base case was still for the Fed to raise interest rates three times this year.

The U.S. economy will be relatively strong this year but the Fed will have to be gradual and patient in raising rates in light of headwinds, he said.

The Federal Reserve last month raised its target range for short-term interest rates to 1.5 percent to 1.75 percent and signaled it expects to increase rates two or three more times this year to keep the U.S. economy from overheating.

Kaplan said he expects the U.S. economy to grow by 2.5-2.75 percent this year, unemployment to go lower and inflation to gradually pick up toward the 2 percent target.

Unemployment has been at 4.1 percent for the last six months, and wage growth, long subdued, has begun inching closer to the 3-percent annual pace of growth that economists say could signal stronger inflation ahead.

Inflation, which has lagged the Fed’s 2-percent target for years, has also begun to pick up in recent months, and Fed officials expect it to finally hit that goal and perhaps exceed it by next year, if not before.  

Economic growth next year will be a little weaker and will trend down to 1.75 percent by 2020, Kaplan said.

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