Former Federal Reserve Bank of Dallas President Robert Kaplan has warned that the mounting banking crisis is “more serious” than the American public realizes.
Kaplan says the situation is direr than commonly believed and he’s calling the central bank to pause its rate hiking cycle.
In an interview on Bloomberg TV, Kaplan says the Fed must give policymakers more time to address the risks.
He called for the central bank to deliver a so-called “hawkish pause” when it announces its decision on interest rate levels later on Wednesday.
“I’d prefer to do what’s called the hawkish pause, not raise but signal that we are in a tightening stance because I actually think the banking situation may well be more serious than we currently understand,” Kaplan said.
The former Fed official’s remarks come as the much-anticipated Federal Open Market Committee (FOMC) policy meeting on May 2–3 is poised to culminate in a decision to raise interest rates by another quarter point.
Odds stand at nearly 90 percent that the Fed will deliver a 25 basis-point rate hike on Wednesday, according to the CME FedWatch Tool.
The move will lift the benchmark federal funds rate to a range of 5.00–5.25 percent.
Since the Fed launched the current tightening cycle in March 2022 in response to soaring inflation, policymakers have raised rates by 475 basis points.
That’s the fastest pace of raising rates since the 1980s.
Investors generally expect the central bank to leave rates high for some time before cutting later this year in light of slowing economic growth.
Kaplan said that it’s more important that the Fed can sustain the current level of interest rates for “an extended period of time, longer than the market thinks” rather than pushing for another one or two rate hikes and then risk having to cut rates, a move that he said would be “very troubling.”
The former Fed official also said that, in order to get inflation under control, Washington needs to rein in out-of-control spending as this works against what the central bank is doing with its interest rate hikes.
His remarks came on the heels of a regional bank stock rout following the decision of U.S. regulators to seize First Republic Bank and facilitate its takeover by JPMorgan Chase.
Regional bank stocks plummeted on Tuesday and pre-market trading on Wednesday extended those losses.