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MNI INTERVIEW:Kaplan Ups PCE Outlook to 3.9%, Urges Taper Talk


Dallas Fed President Robert Kaplan told MNI Tuesday he has raised his inflation forecast for the remainder of the year and into 2022 on a significant widening of price pressures, and urged more debate on pulling back asset purchases.

"Our own view at the Dallas Fed is that PCE will end the year at approximately 3.9%, and that there's a second phase going on right now of a broadening or bleeding out of these initial extreme moves to a broader range of items," Kaplan said. The revised outlook is half a percentage point higher than Kaplan's previous estimate for this year and would mean no slowdown from the most recent report for May.

Overall PCE inflation will slow by the end of next year to about 2.5%, he said. Broader price gains are evidenced by the Dallas Fed's signature trimmed mean measure coming in at about the same pace at that time. "That is a pretty significant move," he said. "Even when you X out extreme moves, you're going to still see broad pricing pressures to the belly of the distribution."

While "not terribly surprised" by June's 13-year high 5.4% CPI inflation rate reported earlier on Tuesday, Kaplan repeated the need for the Fed to begin debating an end to its USD120 billion monthly asset purchases. Fed Chair Jerome Powell has resisted much of that debate this year, saying he's committed to underwriting a complete economic recovery.


"As we approach substantial further progress, I'm probably one who would be more on his front foot, and try to adjust these purchases sooner rather than later," he said. "These purchases are well suited to stimulating demand, but we really don't have a demand issue. We have very strong demand. We've got supply issues."

Kaplan wants a gradual taper and said he's saving "specific comments for the FOMC meeting," while emphasizing that an earlier taper does not imply an earlier interest-rate liftoff.

"People have been assuming if you discuss tapering sooner or you start tapering sooner, it has implications that maybe that means you're going to raise the fed funds rate sooner," he said. "I actually don't think that's accurate."

"If we can adjust our purchases sooner rather than later and avoid doing these purchases for longer than necessary, I think it actually will give us more latitude, if it's appropriate to be patient and to make decisions about the Fed funds rate down the road," he said. Kaplan hasn't made any judgement about whether there needs to be a fallow period between the end of tapering and rate hikes. Some Fed officials, such as New York Fed's John Williams who is also vice chair of the FOMC, have stated a preference for seeing an end to the process of drawing back on asset purchases before raising short-term interest rates.


Kaplan, who isn't a voting member of the FOMC this year, forecasts a rate liftoff in 2022 from its current setting near zero, but "the timing of tapering is not influencing my thoughts on what I submitted on my SEP." He declined to elaborate on his 2023 rate projection, citing a focus on near-term conditions, continued uncertainty, and possibilities that inflation could come in under expectations.

Kaplan also said that while "the job market will continue to improve and recover," he said we "may not see the very strong headline job growth numbers that we might have expected of a million plus per month."

Fears of infections, supply-demand frictions, and over two million retirements since the onset of the virus will hold back the labor rebound, he said. Wages should continue to firm and will also be "a factor" for inflation, he said.

"I'm still hopeful that on the unemployment rate that we can get back to ultimately pre pandemic levels," Kaplan said, adding that the aging workforce means achieving pre-pandemic participation rates may be difficult.

"We are more skeptical about EPOP, and the degree of improvement necessarily you're going to get there," he said.

MNI Washington Bureau | +1 202-371-2121 |

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