By Greg Robb, MarketWatch
The U.S. economy won’t be back on track until late 2022 or sometime in 2023, said Dallas Fed President Rob Kaplan on Tuesday.
In an essay on the outlook for the economy and Fed policy, Kaplan said he thinks the current level of the Fed’s policy interest rate between zero and 0.25% will be appropriate until the economy has weathered the pandemic and is on track to achieve the central bank’s goals of full employment and price stability.
“My best judgement is that it will take at least until late 2022 or sometime in 2023 for these criteria to be met,” Kaplan said.
It is at this point that Kaplan would take a different path than his colleagues.
At its meeting earlier in September, the Fed promised to keep interest rates at zero until inflation is on track to “moderately exceed” the central bank’s 2% target “for some time.”
Kaplan dissented from this statement. He said that there is a difference between the Fed keeping policy easy and keeping rates at zero.
He said he wanted to give future committees flexibility to lift-off of zero while remaining “accommodative.”
If the economy improves and the Fed keeps rates at zero, this means that Fed policy will actually become more accommodative, he said.
“I can understand why future Fed officials will want to remain accommodative at the point in order to ensure we achieve our goals, but will they want to be effectively increasing the level of accommodation by keeping the federal funds rate at zero?” he asked.
“I would like future committees to have the flexibility to make this judgment,” he said.
Kaplan said he believed there are “real costs” for keeping rates at zero for a prolonged period of time.
“Keeping rates at zero can adversely impact savers, encourage excessive risk taking and create distortions in financial markets,” he said.
He noted that some of the seizing up of financial markets in March may have been due, in part, “to some amount of forced selling by over-risked market participants,” the Dallas Fed president said.
Kaplan said his research team expects the economy to grow at about a 30% annualized rate in the third quarter, rebounding sharply from the roughly 32% decline in the April-June quarter.
For the year, the economy will show a contraction of about 3%, he said, with the unemployment rate falling further to 7.5% at year end, from 8.4% in August.
The Dallas Fed expects the economy will grow by roughly 3.5% in 2021 and the jobless rate will decline to about 5.7%. Inflation will remain below the Fed’s 2% target.
These forecasts are highly uncertain because they depend on the path of the coronavirus pandemic and continued fiscal support from Congress.
“A key risk we are watching carefully is the potential waning of unemployment benefits and other forms of fiscal relief, which could cause more typical recessionary dynamics to emerge,” Kaplan said.
U.S. Stocks opened mixed on Tuesday with the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.24% slipping by 38 points.