Dallas Fed President Rob Kaplan on the Economy and Monetary Policy Right Now

Episode Summary

Executive Summary: Bloomberg Odd Lots interviews Dallas Fed President Rob Kaplan on a hot-but-imbalanced post-pandemic economy. Kaplan argues growth remains strong, but inflation and shortages are driven mainly by supply and labor constraints, not demand. He supports tapering asset purchases soon and gradually, while keeping rate hikes separate until 2022. He also stresses productivity, education, and infrastructure to ease long-run bottlenecks.

Main Topics: Post-pandemic macro backdrop (Priority: 5/5): The hosts and Kaplan frame the economy as rapidly recovering, but with pronounced inflation, supply-chain bottlenecks, and labor shortages that make the current cycle unusual. Tapering and the efficacy of Fed asset purchases (Priority: 5/5): Kaplan says Treasury and MBS purchases were highly effective in 2020-21 but now may have diminishing benefits and side effects, so tapering should begin soon and gradually. Separating tapering from rate hikes (Priority: 5/5): He argues the Fed funds rate should stay where it is in 2021, and that tapering should not be interpreted as a signal that rate hikes are imminent. Inflation, expectations, and broadening price pressure (Priority: 5/5): Kaplan is wary of the term 'transitory' and says price increases are broadening beyond a few items, with persistent pressures in materials, semiconductors, housing, and wages. Labor-force tightness and structural changes (Priority: 4/5): He believes labor shortages are more persistent than headline unemployment implies because of retirements, caregiving exits, infection fears, and demographic aging. Productivity, education, and infrastructure (Priority: 4/5): Kaplan says long-run growth depends on improving productivity through infrastructure, Wi-Fi, early childhood literacy, and skills training, especially for lower-education workers. Policy coordination and financial excesses (Priority: 4/5): He rejects the idea that the Fed should monetize debt in normal times, and worries low rates and purchases are pushing investors out the risk curve and inflating housing prices.

Key Arguments: Current growth is strong, but the binding constraint is supply—not demand—especially in labor and materials. Fed asset purchases were useful in the crisis but now show weaker efficacy and more side effects, including risk-taking and housing excesses. Tapering should start soon, but very gradually, to reduce the need for abrupt tightening later. The Fed funds rate and tapering should be treated as separate policy tools; tapering does not imply rate hikes are near. The term 'transitory' is too simplistic because inflation pressures are broadening across sectors and may persist into 2022. Labor force tightness is being driven by retirements, caregiving, aging demographics, and uneven recovery in participation. Higher inflation hurts lower- and middle-income households and smaller firms more than large businesses with pricing power and scale. Long-run growth and inflation outcomes depend on investment in infrastructure, education, and productivity-enhancing technologies. The Fed should not be seen as financing government spending, except in crisis conditions where market functioning had to be stabilized. A wide dashboard of labor indicators, not just headline unemployment, is needed to judge full employment in the post-pandemic economy.

Data Points: 2021 GDP growth forecast: ~6.5% - Dallas Fed view for 2021 growth 2022 GDP growth forecast: ~2.5% to 3% - Expected moderation next year End-2021 unemployment rate forecast: ~4.5% - Dallas Fed estimate End-2021 PCE inflation forecast: ~3.8% - Dallas Fed estimate 2022 headline PCE forecast: ~2.5% - Kaplan's expectation for inflation next year Monthly asset purchases: $80 billion Treasuries and $40 billion MBS - Fed purchase pace Kaplan says is losing efficacy Proposed taper pace: Over about 8 months - Kaplan's preferred gradual baseline Treasury yield mentioned: ~1.1% on the 10-year Treasury - Joe asks about the bond market move Retirements since Feb. 2020: 3 million - Kaplan cites as a major contributor to labor shortages Caregivers who left workforce: ~1.5 million - Workers out due to caregiving responsibilities Workers with high school education or less: 46 million - Kaplan uses this figure to discuss technology disruption and productivity

Pivotal Quotes: "I think we may want to show patience by reducing the RPMs on the car and be willing to allow these supply-demand imbalances time to unfold." — Rob Kaplan: On why the Fed should taper asset purchases rather than keep stimulus running at crisis pace "I worry that they're creating excesses in risk-taking, excesses in the housing market, may be exacerbating imbalances in the economy." — Rob Kaplan: On the side effects of continued Treasury and MBS purchases "I'd rather take my foot off the accelerator soon so we don't need to hit the brakes down the road." — Rob Kaplan: On the case for tapering sooner rather than later

Implications: Listeners should expect a more cautious Fed: tapering likely before rate hikes, persistent inflation pressure into 2022, and more attention to supply, labor participation, and inequality. Markets may stay sensitive to any signal that tapering is being mistaken for tightening.