Three or four more rate hikes appropriate, shape of yield curve important, Fed's Kaplan says

A top US central bank official said on Tuesday that at least a near-term top in short-term interest rates may be somewhat nearer now, while also indicating that he would be concerned should the so-called Treasury yield curve 'invert'.

He also cautioned about the risk of an undue build-up in the level of national debt.

In an essay posted to the webpage of the Federal Reserve bank of Dallas, its president, Robert Kaplan, said the so-called 'neutral' rate of interest for the economy probably lay at around 2.5% to 2.75%.

Hence, he said, the monetary authority would need to hike the target range for the Fed funds rate three or four times, in 25 basis point increments, in order to bring it to that level.

Nevertheless, once that point was reached, "I would be inclined to step back and assess the outlook for the economy and look at a range of other factors — including the levels and shape of the Treasury yield curve — before deciding what further actions, if any, might be appropriate."

On the yield curve, Kaplan wrote: "The longer end of the curve is telling me that, while there is substantial global liquidity and a search for safe assets, expectations for future growth are sluggish — and this is consistent with an expectation that U.S. growth will trend back down to potential."

"I do not discount the significance of an inverted yield curve — I believe it is worth paying attention to given the high historical correlation between inversions and recession."

Regarding the level of government debt outstanding, Kaplan said that recent tax cuts could turn into a "headwind" for economic growth if the country decided to rein in its historically high expected path of debt growth.

Government debt was then standing at $15.7trn, which was the equivalent of 75% of the United States's annual gross domestic product.