How to analyze Dallas Fed President Kaplan's hawkish monetary policy remarks?
Last week, Dallas Federal Reserve Bank Governor Robert Kaplan said that the Federal Reserve “has quite a way” to consider raising interest rates, but he advocates “restraint” and taking more measures to stimulate the economy. Although inflation has been below the Federal Reserve's 2% target for a long time, Kaplan said he is “aware” that inflation may accelerate over the next few years. He said the central bank needs to be aware of the impact of its expansionary monetary policy on financial stability and the value of the dollar rather than doing more necessary. In a telephone interview, he strongly hinted that given the Federal Reserve's almost zero interest rate position and multiple special loans, no more “quantitative easing” measures should be taken at this time.
Kaplan is a voting member of the Federal Open Market Committee (Fed) decision-making committee of the Federal Reserve. He said he is “willing” to allow inflation to “moderately overfall” under certain circumstances, but he said he would oppose “promising” some average inflation as part of his currency's “forward-looking guidance”. Kaplan said that although the economy has recovered, the economy has not recovered as quickly as he had hoped due to the persistence of the coronavirus. He said that the economy is more likely to approach low-end growth of 20% in the third quarter, rather than growing at a certain rate in the high 20s in the third quarter. He expects the unemployment rate to shrink by 4.5% this year, and said the unemployment rate could be 8% to 8.5% by the end of this year. He said that as the economy is still struggling, the federal government needs to continue to provide “relief” in the form of expanding unemployment benefits and providing financial support to state and local governments. However, Kaplan said he was very hesitant to support additional monetary stimulus. The “number one stimulus” must be virus control, he said.
Although the Federal Reserve has kept the federal funds rate within the target range of zero to 25 basis points since March, it has slowed down the pace of bond purchases. When asked if the Federal Reserve needed to speed up the pace of asset purchases or “quantitative easing,” Kaplan objected. He said, “I want to stop judging now because we're doing another thing that may not appear on our balance sheet, but it's having a big impact, and that's these (section 13-3) plans.” “One thing about these plans is that we haven't paid a lot of money compared to our ability,” he continued. Municipal finance plans are an example. Taking is a small part, but these are all meaningful policy steps we're doing in the corporate bond market to help support corporate credit, and even if we're not using a large amount of capital, we still have one or some obligation, and I think it's helping stabilize these markets and causing them to be very strong, which is why we're seeing so many issuances.
Kaplan said, “Therefore, in reality, the amount of economic stimulus provided by the Federal Reserve is greater than what can be seen in terms of interest rates and balance sheet size, and some of these 13-3 plans did not actually appear on the balance sheet because there was no increase in that much capital.” But that doesn't mean they aren't important. I think they had a very significant impact. Therefore, Kaplan believes that the Federal Reserve needs to be very careful and slow in introducing any additional monetary stimulus measures.” So at this point, although we've done a lot, I think I'd rather wait and hand over a few cards to see how we manage the virus and how recovery is unfolding,” he said. I'd rather hold off until we see more information to see if it's necessary to do more because I think when you include the 13-3 plan we're working on, we're doing a ton of stuff. While emphasizing the importance of supporting economic growth to reduce unemployment after the recession caused by the virus, Kaplan also paid attention to inflation, asset prices, and the value of the dollar when evaluating appropriate monetary strategies.
Last week, the US Department of Labor announced that the core consumer index had risen 0.6%. The price index was the largest since January 1991, and Kaplan's rise was slower than some companies.” “There are conflicting things going on,” he said. On the one hand, there is actually huge price pressure on some products — timber, food. Some of this is due to supply restrictions. He said that the inflation situation has become complicated as technological innovation accelerates the delivery of goods and services, the limited “pricing power” of competitors, and forces such as overcapacity in globalization and declining economies. Those who say 'Oops, the dollar is weak, commodity prices are rising, this is inflation', I'm not against them,” he said. But my only comment is that other forces are unfolding, we just need to see how they interact with each other. Although Kaplan expects overall inflation to “weaken” in the “short to medium term,” he is far less confident that inflation will remain so after the time frame.
“After a year or two, the unemployment rate began to fall, and we are close to full employment. I think when I see the weakening dollar, we have to look at how some of these structural factors play a role. I recognize that inflation dynamics may be very different from the past 10 years.” “I don't know they're bound to unfold in the same way,” he continued. “As a result, at a similar level of unemployment, we are likely to experience stronger inflation than last year.” But the truth is, I don't know, it's something we're aware of and we're monitoring it very, very carefully...” He added, “My own prudence is that I don't think the future will be the same as it was in the past.
During the financial crisis of 2008-09 and the current recession, the Federal Reserve was able to rely on low, anchored inflation expectations because it took active and unprecedented measures to stimulate economic growth. However, some people have warned that the Federal Reserve's significant monetary creation in recent months may curb inflation expectations, damage the Fed's credibility, and set the stage for hyperinflation and the collapse of the US dollar. In response to these concerns, Kaplan painstakingly pointed out that the Federal Reserve's special liquidity and credit program is currently scheduled to expire after December 31.” They won't go on indefinitely. Kaplan said, “It is very important to communicate with the corporate bond market and other bond markets that these plans will end. I think it's essential that we don't rely on these Federal Reserve programs to some extent to continue to exist, and this is critical.
The same concerns about inflation and the dollar made him reluctant to anticipate more quantitative easing.” That's why... I'd rather wait because I'd rather show some restraint at this point and see what else might be necessary, because I'd rather not do anything necessary because, yeah, my sensitive impact, the impact of our 13-3 plan, quantitative easing, and interest rates at such a low level — the impact on risky assets, and the impact it could have on the dollar and potential inflationary pressures in the future.” I don't know if I can accurately predict what the world will look like in two to five years, but part of my approach is to emphasize that in a few years from an inflation perspective, the world may look different than it did in the past 10 years, which is very likely.” He explained in detail.” For me, due to the unpredictability of this dynamic, I'd like to show some restraint here.
Meanwhile, Kaplan said that he believes it is too early to consider “normalizing” monetary policy. He pointed out that when he submitted the medium-term economic forecast and “dot chart” of his fund interest rate, he personally predicted that fund interest rates would need to stay within the current target range until the end of next year. Kaplan was unable to say when it would be appropriate to leave the lower limit of zero interest rates, but he said he “wants to see us make more progress in achieving the goal of full employment. We still have a long way to go before considering measures to adjust our monetary policy, as well as our inflation target.
“I reserve the right to update my views,” he continued, adding that any change in his opinion would be “the result of my assessment as the prospects for full employment emerge and within what time frame the prospects for inflation become apparent.” During this time, you'll see that I'm very alert and aware of how things unfold,” he said.
“On the margins, at least... I think what we have done so far in this crisis is appropriate and necessary,” he said, “but I personally would advocate restraint and more action from now on. Although Kaplan is wary of “doing more,” he is far from considering “normalizing” the currency. “At this stage... I'm quite far away from saying we should make adjustments, and even there I can see the point where we'll adjust the federal funds rate,” he said, “but I think in the short term, at least, I don't want to take any extra steps to help promote recovery than necessary. Now I think, for me, how much a jury is going to work, we need to do it.” We've done a lot when you include 13-3, and that's in my mind,” he added.
Although Kaplan expects consumer price inflation to continue for several years, he suggests that the Federal Reserve needs to weigh potential asset price inflation and then financial instability.” The reason I say I want us to be restrained... don't want to do more than we want to do, because when you see the impact of our actions on risky assets, you can encourage people to inadvertently take more risks, use more leverage, create excesses and imbalances that they are building but can be very painful to deal with. Prior to the coronavirus crisis, Kaplan had indicated that the Federal Reserve must deal with the consequences of “embedded leverage” in the financial markets.
The minutes of past FOMC meetings strongly indicate that the committee is moving in the direction of some form of average inflation. Based on this average inflation, the Federal Reserve will allow inflation to exceed the 2% target over a period of time to make up for the impact of previous underestimations on the target. Kaplan seems to agree with this point of view, but he doesn't seem to use average inflation targets as a hard part of monetary “forward guidance” like some of his colleagues. He explained, “On the one hand, I am willing and willing to consider an inflation target of more than 2% after a period of continuous inflation below 2%. However, this is not a promise to act. He said he is willing to support an average inflation target, provided that this target is conditional on “the situation at the time”, including the employment situation. He said the Federal Reserve also needs to “take into account concerns about financial stability”.
Regarding the economic situation, Kaplan acknowledged that recent economic indicators, including the July purchasing manager survey, have been strong, but he said that the economy “just isn't as good as ours, if we have better control over the virus. He said that due to the virus, consumers have retreated, causing the recovery since mid-June to be somewhat “stalled”. Kaplan said that in the future, he will pay close attention to high-frequency data, including “mobility” and “engagement” scales, such as mobile phone usage. You can refer to the Liquidity and Participation Index compiled by the Federal Reserve Bank of Dallas.
Source: Kevin Chen Kaifeng Chen
