The Fed: Fed’s Kaplan says firms lack pricing power

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Krisztian Bocsi/Bloomberg

Dallas Fed President Robert Kaplan

Wage and inflation pressures are building but firms are having a tough time passing those prices to their customers given the impacts of automation and globalization, said Dallas Fed President Rob Kaplan on Monday.

“Pricing power of businesses is more limited than we’re historically accustomed to seeing at this stage in an economic expansion,” Kaplan said, in one of his periodic essays about the economic outlook.

Lack of pricing power could keep consumer inflation moderate, meaning that interest rates may not have to rise sharply.

Kaplan didn’t discuss his outlook for rates in his essay, but told Bloomberg in an interview earlier this month that he sees the Fed raising its target rate twice more this year.

Kaplan expects GDP growth will be strong in 2018 but will moderate in 2019 and 2020. He told Bloomberg that the pace of rate increases could ease as a result.

In his essay, Kaplan said there is too much focus on the short-term and not enough on secular trends.

“Because the near-term outlook for GDP growth is positive, this may lull observers into believing we are on the path to sustained improvement in the economic performance of the U.S. economy,” he said.

“Unless Congress and the White House initiate structural reforms that improve workforce growth, education and skill levels of our labor force, moderate the expected path of government debt growth, and adopts policies that allow us to capture the opportunities provided by globalization, we are likely to see sluggish rates of GDP growth in the medium and longer term,” he said.

The 10-year Treasury note yield TMUBMUSD10Y, +0.75%  climbed early Monday as worries about an escalation of hostilities in Syria faded. The market expects the Fed to hike two more times this year, according to CME Group’s FedWatch tool. Many analysts think the Fed will pick up the pace slightly and hike rates three more times in 2018.