Dallas Fed President Talks Rates, Inflation, and More

With the economic recovery coming to an inflection point and Federal Reserve officials beginning to talk about tightening policy, it's easy to dismiss a nonvoting member's musings on inflation, interest rates, and emergency bond-buying programs as irrelevant. That would be a mistake. 

In a question-and-answer session with Barron's reporter Lisa Beilfuss, Dallas Fed President Robert Kaplan expressed concern on excessive risk-taking and the consequences of overly easy monetary policy. Kaplan, who gains a Fed vote in 2023 just as many officials expect liftoff on interest rates, is among a small group of Fed rate makers who want to begin moving to tighten policy "sooner rather than later."  

Here are some highlights from the Q&A, due to publish Friday morning on Barron's:

You’ve said that the Fed should begin to gently take its foot off ofthe accelerator, in order to lower the probability of having to hit the brakes later. What does that mean?

I would start with the $80 billion of monthly Treasury purchases and $40 billion of monthly mortgage-backed securities purchases. Those purchases were highly appropriate in 2020, when we were in the middle of a crisis, in the same way that, in the aftermath of the Great Recession, we were very concerned about a lack of demand.

As we now move from early 2021, we’ve had accelerated vaccinations. We’re expecting very strong GDP growth forthis year. We are making progress in not only weathering the pandemic, but on our employment mandate and our price-stability mandate. I, for one, think that these purchases are less suited to the current situation, where we have plenty of demand and all evidence suggests the consumer is very strong.

With your preference to begin tapering sooner, rather than later, would you have dissented at the last FOMC meeting, had you been a voter?

Let me answer this way: We’re in a much better place now that we are having an active, open debate about our adjustment of asset purchases.

Do you worry about the market’s reaction to tapering?

We’ve got to be very sensitive to the lessons of 2013, and when we start tapering, it has to be well-telegraphed and it has to be gradual. We also must keep in mind the substantial amount of pension-fund money in the U.S. that is looking for fixed income. For many of them, there’s a core investment in the Treasury curve. Globally, our rates are relatively high, so there’s a bid for U.S. dollars and for Treasuries. I think we’re fortunate, and we’ve got the ability to successfully execute this.