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Fed's Kaplan drops call for near-term U.S. rate hike

The Federal Reserve building in Washington September 1, 2015. REUTERS/Kevin Lamarque

NEW YORK (Reuters) - A top Federal Reserve policymaker on Thursday dropped his promise to advocate for a U.S. interest-rate hike soon, and suggested that current near-zero rates may not be stimulating the economy as much as thought.

In remarks prepared for delivery to the Money Marketeers in New York, Dallas Federal Reserve Bank President Robert Kaplan made no changes to his forecasts for U.S. growth and inflation. And he said, as he has in other recent appearances, that the removal of the Fed's monetary policy accommodation "should be done in a gradual and patient manner."

But in a departure from recent speeches, he did not say he would advocate for rate hikes.

He used much of his speech to recap a growing body of research that suggests the Fed has less room than in the past to raise rates without putting unwanted brakes to the U.S. economic engine.

Evidence is growing that the so-called neutral rate has declined sharply. Fresh forecasts released last week show Fed officials now believe that a healthy U.S. economy can maintain full employment and stable prices with a policy rate of only 3 percent, well below the 4.25 percent rate they saw just four years ago.

"I am strongly persuaded by arguments that aging demographics in advanced economies, a decline in productivity growth and the continued emergence of the U.S. as a source of safe assets have all contributed to the decline in the neutral rate," he said.

Kaplan's comments reflect a broader debate taking place both within the Fed and without over the long-term prospects for U.S. growth. Fed Chief Janet Yellen has also pointed to the constraints that lower potential U.S. growth are putting on Fed policy, and economists suggest that it is one reason the Fed has had to downgrade its own expectations for rate hikes this year and next.

Citing research from colleagues at his own bank, Kaplan said that the Fed's current policy rate of 0.25 percent to 0.50 percent is providing only a modest boost to the economy because the neutral rate is so much lower than it used to be.

"If we are going to generate higher sustainable rates of GDP growth and address key secular issues, there needs to be policy action beyond monetary policy," he said, naming fiscal, immigration and trade policy as potential solutions.

He did not mentioned the U.K. referendum on European Union membership in his prepared remarks.

(Reporting by Jonathan Spicer, writing by Ann Saphir; Editing by Diane Craft)