Kaplan Says Fed Needs to Stay Accommodative

Thank you tom and good morning to you president kaplan dallas fed president kaplan one of two dissenters last week as the fed adopted new forward guidance that incorporates average inflation targeting you endorsed the old

Forward guidance and dissented on the new because according to this statement you prefer the committee retain greater policy flexibility beyond that point

What does that mean what it means is i i believe strongly we should keep the current setting of the fed funds rate i.e at zero zero to 25 basis points until we've weathered the pandemic

And we're well on track to achieve full employment and price stability uh that by the way is probably going to take at least two two and a half three years the issue is beyond that point once

We've weathered the pandemic and we're on track to reach our goals i i probably think it's appropriate to remain accommodative or maybe even highly accommodative i'm not sure it's appropriate to

Decide right now that at that point we should leave rates at zero i would rather leave those judgments to future committees because i think the world is going to look very different post-pandemic than

It does now and i'd rather leave the judgment to future committees who can assess all the factors that are relevant in order to make that decision well does that suggest you think that we

Could come out of this with faster growth than most people are anticipating uh or i'll put it a different way uh in my own forecast i think we're gonna have solid growth in the third quarter 30

Annualized a strong fourth quarter above trend growth in 2021 and in my own forecast by the year 2023 and i know that's going out a long ways uh we could we could start to approach an

Unemployment rate certainly below four percent say three and a half to four percent and so i believe that is possible obviously we'll have to see and a lot of that is going to depend

On how will we manage this virus fiscal policy and a whole range of other decisions but when we get to that point the question before the house is do you want to do you want to still be

Accommodative in light of our new framework in order to meet our inflation goal uh in order to remain accommodative does that mean we need to leave rates at zero and and i'm not sure but that's the

Point uh i think it's hard to know right now that far in advance and i want to make those judgments at the time was that enough to dissent on important

Enough for me it for me it was and the reason it is is by making this commitment now first of all there are few reasons why descended what i just went through

And then my own view is i'd rather use forward guidance where we got more positive benefit going into the meeting the world already thought that rates were going to stay extremely low for the next two or three

Years and so my concern was by making this commitment now i wasn't sure how much additional benefit we're going to be but on the negative side it means if you're in the

In the asset markets if you're a saver if you're a pension fund if you're an insurance company if you're a market participant it basically gives you a signal that you're not going to be

You're going to need to take more risk and my concern is about building up excess risk taking which can create fragilities and other excesses in the system which are hard to see in real time and

Easier to see in hindsight that could create issues for us to meet our goals and so that was the reason uh i felt that the the costs were not worth the benefits

Well in his uh news conference chairman powell was it pains to say over and over again the new guidance is strong and powerful but there seems to be a lot of skepticism on wall street about that

Well and i wouldn't overread the market reaction it's been a few days and i think these decisions usually are not uh are not the reaction is not measured in three or four trading days it's

Measured in the full fullness of time i think making a statement that people should expect even beyond the pandemic that rates are going to stay at zero until we reach two percent

And are on track to moderately exceed two percent for some time i think as the months and the years go by i think people will will increasingly realize the power of that commitment

And and so i think it's more significant than the markets may be initially realizing well washington is consumed now by a fight over the supreme court which many analysts say pretty much ends chances of getting any

Kind of additional stimulus at least before the election and possibly afterwards what does that mean for the economy well i think in my forecast for this year

Um i think some additional fiscal stimulus is uh is part of that and and one of the unusual features of this downturn has been uh consumer spending has been very strong despite the elevated

Unemployment rate that usually doesn't happen in a downturn and it's happening because of strong fiscal support and so i think some extension of unemployment benefits is critical

And i also the second thing i'd mention is aid to state and local governments i think is also important they they all they have big fiscal holes they are they are needing to cut back because of that right now at a time

Where we're asking the shoulder more responsibilities in fighting the pandemic and getting kids back to school and and a number of other responsibilities and so i think fiscal uh some fiscal support

I'm still hopeful for it and i think it's important to this recovery the markets are at this point uh not just discounting what you did last week but concerns over the supreme court and a

Round of uh pandemics we've been asking for months about whether markets were too high and might fall dragging down the economy what's your read on what's going now

Well i won't go too far in this job commenting on the markets other than to say market cap to gdp is currently at a historic high and at historic highs there's some

There's some understandable reasons for that but normally when you've had this kind of run uh some kind of correction could actually be healthy and so uh the thing i watch when i see a

Market sell-off is our credit spreads widening and i don't see them widening which tells me right now this is more of a correction maybe not a fundamental change if i saw

Credit spreads widening along with the sell-off that would tell me something different but i'm not seeing that well tight credit spreads and low interest rates suggest

The fed policy is working at the moment but if we do have a need for additional stimulus and we don't get it is there anything the fed can do or are you sort of out of the game done what

You can do i think monetary policy has done a lot we still have more uh things we could do and certainly with either asset purchases i think we could do more to

Help small mid-sized businesses but i think the path of the pandemic the incidence of the virus is still going to be the number one determinant of how fast we recover and i think some

Amount of fiscal policy secondarily is important but but i think monetary policy will do its part it's not though the primary driver of this recovery right now

Uh i i think it's still how well we manage the virus the other issue uh you just mentioned the main street lending program and you also talked about the municipal lending facility

Chairman powell goes up to capitol hill and they're going to be asking the question why aren't those working there's been almost no take up one loan for the municipal facility and only two tenths of one percent of

The money for main street has been lent what's wrong with the the fed programs well so let me just segment these i think it's a mistake to judge the effectiveness of most of these programs by the take-up

The main street program let me put off to the side that that's a little bit different but on a municipal finance program is a good example we have backstopped issuance in the municipal finance market

Uh with a capacity of 600 billion dollars as soon as we announced that program uh the municipal finance market rallied money flowed into those mar that market that's true with the

Corporate bond market it's true with other markets that we've done this for so i i actually think the the measure of how effective those programs are is is uh are people able to issue in the

Private market the fact there haven't been there hasn't been much take up we're intended to be backstop pricing so i think those programs have actually been very very successful

The the one program we've scrutinized more though is the main street program on that program take up is a good measure of how effective it's been and has has been a lot of discussion uh there's still stringent credit uh

Requirements for that program the banks have to agree to lend as part of that program and and so we are looking at ways and there's been discussion

Can more be done to make that program more attractive but again the fed is a lender not a spender and in order to ease the requirements of main street you'd have to be willing to tolerate more credit losses

And that's not a fed decision that's a decision for congress and the treasury