Fed's Kaplan sees U.S. rates 'roughly' right, risk from virus

By Ann Saphir

(Reuters) - Dallas Federal Reserve Bank President Robert Kaplan on Tuesday repeated his view that the current setting of U.S. interest rates is "roughly appropriate" through the end of this year, even as he noted risks from the flu-like epidemic that has brought parts of China to a halt.

Predicting consumer-led U.S. GDP growth of 2% to 2.25% in 2020, a drop in U.S. unemployment to 3.5% from 3.6%, and a rise in inflation toward the Fed's goal of 2%, Kaplan sounded fairly upbeat in an essay released Tuesday morning laying out his assessments.

"Of course, this outlook is clouded by the impact of the coronavirus originating in Wuhan, China," Kaplan said. The disease has sickened more than 70,000 and killed 1,868 people, nearly all in China.

Economists at the Dallas Fed are looking at different possible scenarios for the epidemic's effect on U.S. and global growth, Kaplan said, but "it is still too soon to predict with confidence the ultimate impact" on the economy.

Also a potential drag, he said, is the delay in production of the troubled Boeing (NYSE:BA) 737 Max airplane; meanwhile the return of post-strike production at General Motors (NYSE:GM) should boost first-half growth.

The Fed cut rates last year to 1.5% to 1.75% to help protect the U.S. economy from the effects of a global growth slowdown and trade uncertainty.

Both of those risks have abated this year, Kaplan said in his essay, with growth abroad stabilizing, a first-phase U.S.-China trade deal reached, and greater clarity on Britain's exit from the European Union.

Kaplan also noted his hope that expansion of the Fed's balance sheet will moderate significantly by June, and that once reserves in the banking system reach $1.5 trillion they will grow only gradually from there.

He has in the past noted his worries that the Fed's balance sheet expansion could add to financial market imbalances, though he did not repeat those worries on Tuesday.

Most of Kaplan's essay reiterated remarks he has made in recent weeks in other public appearance, including a prediction that U.S. oil production growth will slow this year and capital spending in oil and gas will drop 10% to 15% as a result.

One new section, on the growth in renewable energy, did stand out.

"Dallas Fed energy economists expect that global energy consumption will increasingly reflect reduced reliance on fossil fuels (oil, natural gas and coal) as a share of total consumption," wrote Kaplan, whose Fed district encompasses the country's most productive oil fields and some of its biggest refineries.

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"While estimates of the increase in renewable energy production vary, there is clear evidence that a transition is underway in the energy industry," he said, adding that investments to mitigate the impacts of climate change are likely to provide "substantial growth opportunities" for U.S. businesses.