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Sept. 21, 2020, 10:59 a.m. EDT

Fed’s Kaplan says he’s worried new forward guidance will spark risky trading

Benefits of pledging to hold rates at zero don’t outweigh cost, Dallas Fed president says

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By Greg Robb, MarketWatch

Bloomberg News/Landov
Dallas Fed President Robert Kaplan dissented from the Fed policy decision last week.

The new Federal Reserve forward guidance could create “fragilities” and “excesses” in financial markets, said Dallas Fed President Rob Kaplan on Monday.

Last week, the Fed promised to hold its policy rate close to 0% until inflation is on track to “moderately exceed” the central bank’s 2% target “for some time.”

Kaplan, along Minnesota Fed President Neel Kashkari, was one of two dissenters to the framing of this so-called forward guidance, which provides market participants some guidance about the future path of interest rates. The Federal Open Market Committee earlier this month debuted its new forward guidance. Kashkari said the problem with the Fed’s new guidance is that it still holds on to the importance of the unknowable variable of a maximum sustainable job level.

One reason for his opposition, Kaplan said, was it gives institutional investors a signal “you’re going to need to take more risks,” Kaplan said in an interview on Bloomberg Television.

“Excessive risk taking...can create fragilities and other excesses in the system which are hard to see in real time and easier to see in hindsight and can create issues for us,” Kaplan said, in an interview by Bloomberg News.

“I felt the costs were not worth the benefits,” he added.

The Dallas Fed president said there wasn’t much benefit from announcing forward guidance last week because financial markets already believe the Fed will hold its policy rate steady for years.

Kaplan was upbeat about the U.S. economy, seeing a strong fourth quarter and “above trend growth” in 2021. It is clear that the economy will snap back sharply in July-September as the lockdown from the pandemic from April and May ended.

Kaplan said this forecast was predicated by some additional spending from Congress to help the economy.

“I’m still hopeful for it. And I think it’s important to this recovery,” he said.

There is growing worry that the fight over the new vacancy on the Supreme Court sinks the slim chances of another fiscal package until next year.

Stocks opened sharply lower on Monday with the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -3.19%   down over 800 points.

US : Dow Jones Global
-877.16 -3.19%
Volume: 266.64M
Oct. 28, 2020 1:11p

Greg Robb is a senior reporter for MarketWatch in Washington. Follow him on Twitter @grobb2000.

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