Federal Reserve Bank of Dallas President Robert Kaplan said Britain’s vote to exit the European Union could slow growth and the most significant question raised by the decision lies in potential spillover effects as other countries ponder their own place in Europe.
“Is there contagion? What does Ireland do? What does Scotland do? What do other EU countries do?” Kaplan told Bloomberg in an interview Thursday in Washington. “In this case, political and economic are intersecting. And it will take a significant amount of time to see how all that unfolds.”
Kaplan’s comments come a week after the U.K. voted to exit the European Union, news that shook global markets and led investors to almost completely discount a Fed interest rate increase this year. He said the decision is also creating a financial market reaction and spurring uncertainty that will drag on growth.
“At a time where global GDP growth has been sluggish or disappointing, I think an event like this on balance is going to tend to reduce GDP growth,” Kaplan said.
Central bank pledges of support have helped to contain the fallout from the Brexit decision, helping global equities to recoup part of the $3.6 trillion of market value wiped out Friday and Monday.
Kaplan is only the second Fed official to comment publicly since the Brexit vote. Governor Jerome Powell said on Tuesday that the U.K. decision added to negative risks from abroad, and “as the global outlook evolves, it will be important to assess the implications for the U.S. economy, and for the stance of policy appropriate to foster continued progress toward our objectives.”
Though markets currently expect the Fed to keep rates on hold at least through December — and even then the chance of a hike is viewed as low, according to prices in interest rates futures — Kaplan noted that there’s an employment report between now and the Fed’s next meeting is July 26-27 and the market could move again. He declined to comment on his own outlook for rate increases.
Speaking about market expectations in general, Kaplan said that “my guess is you’re going to see some convergence between what we’re planning on doing and what the market thinks we are going to do.”
That’s “not perfect, there’s always a gap. But my experience is, this divergence tends to take care of itself,” he said. “In which direction, I’m not sure yet.”
Kaplan became the Dallas Fed’s president in September 2015 and will be a voter on the policy-setting Federal Open Market Committee next year.