Former Dallas Fed President Kaplan said in an interview that the US banking crisis is far from over and the Fed should pause rate hikes.
"I'd prefer to do what's called the hawkish pause, not raise but signal that we are in a tightening stance, because I actually think the banking situation may well be more serious than we currently understand," said Kaplan.
He went on to say that the decline in bank stocks was entirely due to their overinvestment in US Treasuries, while the "normally more serious" credit phase had not yet unfolded.
Slumps at US regional lenders revived concerns about financial stability just a day after Wall Street breathed a sigh of relief over a bailout of First Republic Bank (FRC.US). The S&P 500 index closed down 1.16% on Tuesday. Among them, US regional banks PacWest Bancorp (PACW.US) and Western Alliance Bancorp (WAL.US) both crashed more than 15% before the Fed announced its interest rate decision.
Swap traders estimate the US Fed will hike the rates by 25 basis points later on Wednesday local time, raising the key rate to the highest level since 2007. Markets are also pricing in the hike as the last of the tightening cycle before slowing economic growth forces the Fed to cut rates later this year.
Kaplan indicated that "it is more important to be able to sustain the current rate for an extended period of time, longer than the market thinks, than to get another 25-50 basis points and risk having to cut again. I think that will be very troubling".
To quell inflation, the US needs fiscal restraints and action outside the Fed's purview, "so I will pause here," he added.