MNI INTERVIEW: Fed's Kaplan Open to Yield Curve Control

--Not Expecting Full Rebound Until Well Into 2022 

By Evan Ryser

     WASHINGTON (MNI) - Dallas Fed President Robert Kaplan told MNI he's more

inclined to further monetary supports like yield curve control and committing to

run inflation above 2%, to support an economic recovery that will take well into

2022.

     The economy needs additional fiscal and monetary support, and more success

containing Covid-19, Kaplan said Wednesday from Texas, one of the earlier states

to re-open. 

     "We are in a crisis and we've got to take actions that improve our economic

prospects, and I think it is critical to the future of the country that we do

that. Our priorities have changed," he said.

     "We are going to be issuing a substantial amount of Treasury securities

into the future. At the same time, we have an elevated level of unemployment and

we need to generate growth," Kaplan said. "I am open-minded about options to do

that. Yield curve control is one of those options," Kaplan said, adding it needs

further discussion. 

     Before the pandemic Kaplan was a voice for moderating the size of the Fed's

balance sheet, citing concern over the central bank's "distorting effects" in

markets.

     --JUNE MEETING

     The voting FOMC member expects more disinflation for the "short-run and the

medium-term" and the jobless rate to peak in excess of 20% in the second

quarter. Even its decline to about "10 to 12%" by the end of the year and again

to 7% next year will reflect slack in the economy, he said.

     Kaplan said about the upcoming June FOMC meeting: "I would continue to

expect a reiteration of commitment to the programs that we're currently

pursuing" for small- and mid-size businesses, and a "reiteration" of forward

guidance about interest rates.

     The Fed is "going to continue to use asset purchases to help" and "I am

personally open to other options for how we use the balance sheet to aid full

employment and price stability," Kaplan said.

     Covid-19 is also changing Kaplan's thinking on the Fed's policy framework,

under review since November 2018. Before Covid-19, he had concerns over binding

the hands of future central bankers.

     "I was willing to give a framework where we got inflation to 2% and willing

to run above it for a period of time. But I didn't want to make forward

commitments. As we sit here now the situation is very different," he said. 

     --COVID TESTING

     Today, business leaders and officials worry that without a dramatic

increase in Covid-19 testing, people will be skittish about returning to work

and travel routines, he said. "People still complain to me they're on waiting

lists and there are delays" in testing, he said. 

     "It's not profitable to reopen," for many firms, Kaplan said. 

     Texas, the country's second largest state, allowed retailers, restaurants

and theaters to reopen with limited capacity May 1. Water parks and food courts

will reopen this week. Kaplan has gone out to restaurants and stayed at two

hotels but said demand is relatively low. 

     "Strong testing, contact tracing and other procedures are going to be

critical - along with monetary and fiscal policy - if we're going to grow faster

and reduce the unemployment rate."

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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