Oil won’t be balanced until 2017

Dallas Federal Reserve President Robert Kaplan on Thursday called on the Fed to be patient when it comes to raising interest rates, citing the effect of tighter financial conditions on U.S. economic growth.

Kaplan believes that there is high downside risk in the outlook for world economic growth and also said that global financial conditions have tightened, restraining growth potential.

Factors like the drop in world stock markets, the decline in the price of oil and the rise in the dollar since the beginning of the year are acting like a brake on the U.S. economic recovery, similar to the effect of an interest rate increase, he said.

“While I believe that excessive accommodation carries a cost in terms of distortions and imbalances in hiring, asset allocation and investment decisions, I also believe that, at this juncture, the Fed needs to show patience in decisions to remove accommodation,” Kaplan said in remarks prepared for delivery in Austin, Texas.

In this environment, Kaplan, an alternate voting member of the Federal Open Market Committee, said that the U.S. central bank should be patient in removing accommodations and should avoid a predetermined policy path.

The Dallas Fed president said more specifically that the world must adjust to lower growth in China in the coming years and sees potential negative spillovers for the U.S.

That being said, Kaplan is optimistic about the U.S. economy and said it will be resilient in 2016. While he says that weakness in energy will slow job growth in Texas, lower oil and a strong dollar should continue to benefit the U.S. consumer. Kaplan also said that the oil production surplus should fall by half a million barrels per day this year.