Robert Kaplan, President of the US Federal Reserve in Dallas, spoke again in an interview with MarketWatch on Tuesday in favor of starting a conversation about the central bank taking its foot off the gas in order to support the economy.
Kaplan said he had more confidence than three months ago that the economy will weather the pandemic and be on track to meet the Fed’s goals of full employment and price stability.
The Fed bought $ 120 billion a month in government bonds and mortgage-backed securities and kept interest rates near zero to help the economy.
In December, the Fed announced that it would continue to buy assets until the economy reaches a “sustained improvement” benchmark to meet its targets of full employment and long-term inflation of 2%.
“A lot has changed since December,” said Kaplan, citing strong fiscal policies, relatively quick adoption of vaccines, and improved mobility and engagement by Americans in the economy.
“I think it will make sense to at least discuss how we would adjust these purchases and have these discussions sooner rather than later,” Kaplan said.
Last week Fed Chairman Jerome Powell said the economy was nowhere near “significant further progress” Benchmark as a prerequisite for the Fed to limit its support for the economy.
In the interview, Kaplan said he thought the phrase “significant further progress” refers to an economy “on track” to meet the bank’s employment and inflation targets, and also to a feeling that the economy is weathering the pandemic have. “At least for me, I have a better view and more confidence that we can see light at least at the end of the tunnel to reach this benchmark,” said Kaplan.
The Fed should begin to discuss the benefits of the purchases and the “costs and side effects” which include excesses and imbalances in financial and housing markets, he said.
“I think it makes sense to recognize that buying government bonds and mortgage-backed securities is one of several factors” that affect valuations in the financial and real estate markets.
“There will be a debate about what meets this benchmark and we will debate it,” he said.
Kaplan said he did not know if the Fed would start talks about reducing its asset purchases at its next political meeting in mid-June. He said it was a “group decision”.
On Monday, two Fed officials, New York Fed President John Williams and Richmond Fed President Thomas Barkin, said the economy was improving but not performing well enough to consider scaling back the bond purchase program.
Barkin told CNBC that a key metric for the economy is the employment-to-population ratio, which has made “modest progress” in recovering from the depths of the pandemic.
Kaplan said there is a “fog” around labor force participation rates. Some workers have retired, some women are staying home and looking after children, and some poorly paid workers do not want to return to the front lines on low wages. These reluctant workers are currently receiving unemployment benefits and are patient, Kaplan said. “All of these factors are frictions in the labor market. They are not indicative of the lack of job availability, ”Kaplan said.
“I think it will take a while for the fog to settle on the participation rate,” said Kaplan.
Rising inflation is on the minds of investors as the economy revives. Fed officials have downplayed the risk of the economy overheating despite all fiscal stimulus and simple Fed policies.
On Monday, New York Fed President Williams reiterated in comments on Powell He expects inflation to “surpass” the Fed’s 2% target this year, but to decline next year.
Kaplan told MarketWatch he wasn’t sure how inflation will behave in 2022.
He said his business contacts are no longer sure that the supply and demand bottlenecks that are leading to higher prices will be resolved this year. “Some of them are a little less sure now. The time frame is being postponed, ”he said.
Businesses are struggling to meet strong demand, he said.
“One of them said it was like trying to go up an escalator,” Kaplan said.
Based on his overall assessment of the economy, Kaplan believes the Fed will raise interest rates from zero sometime in 2022. Until then, he believes the economy will meet the three objectives of the new Fed framework: full employment, inflation at 2%, and inflation can be seen to be moderately above 2% for some time.
Earlier on Tuesday, Treasury Secretary Janet Yellen said the Fed may need to raise interest rates to ensure the economy doesn’t overheat.
“Based on my forecast, this will happen in 2022,” said Kaplan, adding, “we have time to assess this and see how the economy performs.”
Most Fed officials don’t expect a rate hike until after 2023.
Kaplan said it made sense that the Fed was less preventive than it has been in the past. However, he noted that the Fed could remain “very accommodative” without keeping rates at zero.
“In the next few years there will come a point where we should be very accommodative, but that could mean the fed funds rate is above zero,” he said.
He noted that the so-called neutral rate on the economy – which rates neither support nor depress growth – will rise higher amid predictions of a strong US economy. If the Fed doesn’t hike rates at the same time, it’s more accommodative.
Kaplan differed from noted economist and former Pimco executive director and co-chief investment officer Mohamed El-Erian, who argued in a Financial Times statement that the Fed’s new tripartite framework could effectively hold monetary policy hostage. “I support the framework,” said Kaplan. “We’ll have differences of opinion on how to do it.”
Stocks ended up mixed with the S&P 500 on Tuesday
Index falls 0.67% and the Nasdaq Composite
They are losing nearly three times as much ground as the Dow industry
DJIA, + 0.06%
made a profit.