July 12, 2021 BARRON’S 29
Kaplan may be one of the Fed’s most
hawkish members, yet even he thinks
it’s premature to talk about rate hikes.
pressures will be more persistent, and
you will see some broadening, or what
we call “bleed.” If raw-material prices
are higher this year, that could bleed
into goods and services. Elevated home
prices will eventually bleed into higher
rents.
Investors are trying to understand
what Fed officials mean by “transi-
tory” or “nontransitory” inflation.
I’ve avoided those terms. I prefer to
refer to them as impacts that are cycli-
cal and relate to the reopening, or oth-
ers that are more secular, more struc-
tural, and therefore more persistent.
So,isthecurrentlevelofinflation
concerning? Or cyclical?
Iguessalittlebitofboth.I’mvery
mindful that monetary policy and the
work we do needs to be forward-look-
ing. If you could just call timeout and
stop the music right now, it looks to me
that inflation expectations are manage-
able, and not inconsistent with our 2%
mandate.
Butwhathashappeneduptonow
isn’t as relevant as what happens in the
future. And I’m sensitive to the fact
thatyouhaveseveralmoremonthsof
elevated inflation prints. That could
start to seep into inflation expectations,
and that’s why it’s also important that
the Fed emphasizes that we’re vigilant
to these trends and committed to an-
choring inflation expectations and
inflation at 2%.
You’ve said that the Fed should be-
gin to gently take its foot off the
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 con-
cerned about a lack of demand.
As we now move from early 2021,
we’ve had accelerated vaccinations.
We’re expecting very strong GDP
growth this year. We are making prog-
ress in not only weathering the pan-
demic, but on our employment man-
date 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 taper-
ing sooner rather than later would
you have dissented at the last FOMC
meeting, had you been a voter?
Letmeanswerthisway:We’reina
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. look-
ing 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 abil-
ity to successfully execute this.
Are there more risks in tapering
tooearly,ortoolate?
Doing these purchases for longer than
necessary creates excess imbalances in
the economy, in financial markets, and
certainly in the housing market. It
would be healthier to be weaning off
these extraordinary measures sooner,
rather than later. That would give us
more flexibility down the road. You
don’twanttobesopre-emptivethat
you suffocate growth and getting to full
and inclusive employment, but you
don’twanttobesolateastobereactive
and having to take more abrupt or
severe actions. That’s the trade-off we
need to be debating.
Given that the Fed has said it would
like to see “substantial further
progress” in meeting its inflation
and employment mandates, what
do you mean by “sooner rather
than later?”
I’ve been careful not to give a calendar
date, but we are going to achieve “sub-
stantial further progress” sooner than
people think. If I’m driving and see
potential obstructions and risks on the
road, I’d rather tackle those risks going
at 55 miles an hour than I would at 80
miles an hour.
I’m very glad we’re now having the
discussion about adjusting these pur-
chases. And yes, I’m deliberately sav-
ing my specific comments on the calen-
dar for my Fed colleagues in the
privacy of an FOMC meeting. But I
think people can tell what I mean
when I say sooner rather than later.
Are you concerned about the hous-
ing market, and the impact of mort-
gage-backed bond purchases?
Home prices are historically elevated.
We know that. And in addition, we’re
hearing more and more that the win-
ning bidder for many of these single-
family homes isn’t a family: It’s a fund
of some type, not domiciled in our dis-
trict, buying sight-unseen and plan-
ning to rent it. More and more families
are being squeezed out of purchasing a
home, particularly first-time home
buyers and across at-risk communi-
ties. This is having ripple effects, in
terms of higher rents and higher prop-
erty taxes.
What do you say to would-be first-
time home buyers? Will prices
come back down, or is it over for a
lot of these people?
In this job, I’ll stay away from predict-
ing where markets or home prices are
going. But I will say this: At this stage,
the unintended side effects of these
asset purchases are starting to outweigh
the benefits. I certainly don’t think
housing needs the type of Fed support
we’re providing right now. We’re buy-
ing a substantially large percentage of
net new issuance of agency mortgage-
backed securities, and the option-ad-
justed spreads are historically low, and
sometimes negative.
In the last tightening cycle, before
the pandemic and with unemploy-
mentata50-yearlow,theFed
wasn’t able to raise rates above
2.5%. Since then, households, busi-
nesses, and the U.S. government
have accumulated more debt. Why
would the Fed be able to tighten
now?
Idon’tthinkit’sappropriateyettobe
talking about rate increases. As we get
through this crisis, we’re going to have
very strong growth in 2021. It’s going
to moderate to some extent in 2022 and
in 2023, and we’re going to gravitate
back down to trend growth—some-
thing like 1.75% to 2%.
Debt has ballooned with interest
rates so low for so long. Is the Fed
boxed in to ultralow rates forever?
I do worry about excess risk-taking.
I’m not smart enough to know whether
certain markets are in a bubble, but I
focus on investors moving out on the
risk curve. Savers are unable to earn
on savings, and they’ve got to take
more risk. When the stance of mone-
tary policy is such that people need to
move out on the risk curve—even peo-
ple who probably otherwise really
shouldn’t be taking that much risk—I
worryabouttheimpactofthat.When
they [eventually] want to derisk, it
makes them vulnerable to a scenario
where you could have a severe tighten-
ing of financial conditions, a widening
of spreads [between higher-yield and
investment-grade bonds] as people
realize they are overrisked and [need
to deleverage].
That’s something you have to toler-
ate when you’re in the middle of a cri-
sis, but it’s healthier when people can
have more-balanced risk profiles.
What do you say to criticism that
the Fed has become too beholden to
the financial markets?
Our main focus needs to be doing
what’s right for the economy. But it’s
wise to acknowledge the impact that
our asset purchases can have on finan-
cial assets, and some of that criticism is
healthy for us to acknowledge.
One of the things that comes with
these extraordinary monetary-policy
actions is the positive effect on finan-
cial assets. It’s also the reason why, as
you emerge from the crisis, you want
to wean off these extraordinary actions
sooner rather than later.
Federal Reserve Bank of Dallas Thank you, President Kaplan. B
He advocates for a well-telegraphed
and gradual tapering of the Fed’s
extraordinary asset purchases.
“I do worry about excess risk-taking. ”
Robert Kaplan, Dallas Fed Chief
Inflation
Creep
Inflation is
expected to end
the year at
3.4%
as measured
by the personal
consumption
expenditure
index.