MNI POLICY: Fed's Kaplan Shows Doubts About Containing Virus

--Growth Forecast Is Unchanged, But Health Discipline Required

By Evan Ryser

     WASHINGTON (MNI) - Dallas Fed President Robert Kaplan expressed doubts

about how well U.S. containment of Covid-19 is going, something that weighs on

this year's economic recovery and how much permanent damage will be sustained.

     The U.S. economy is beginning to recover, but there is a big caveat with

the advance of the virus, he said. Kaplan still expects GDP this year to

contract "in the neighborhood of 5%" with unemployment from 8% to 10% at

year-end. 

     Mask wearing, testing, contact tracing, and good hygiene will drive the

recovery and so far "the jury is out," Kaplan, an FOMC voter, said Thursday. 

     "We are going to see consumers who are going to be reluctant to re-engage

in a broad range of activities, which will help bring back small businesses, the

service sector, and other business, but it won't happen to the extent it would

have unless we really are disciplined here," Kaplan said. 

     In an MNI interview earlier this year, Kaplan detailed progress he saw

visiting hotels and restaurants in Texas, one of the first states to re-open and

now seeing a record jump in new virus cases. Soon after Kaplan's remarks, Texas

Governor Greg Abbott announced a pause in further re-opening.

     --WEARING MASKS

     The economy needs more support with extended unemployment benefits and aid

to states and other localities, Kaplan said, but "they are not going to be a

substitute for basic things like people in the United States wearing masks."

     The Dallas Fed chief also echoed comments from Jerome Powell and other

policy makers in favor of Congressional action that makes monetary policy more

effective. "I'd rather spend hundreds of millions of dollars or even billions of

dollars on healthcare protocols so we can avoid spending trillions of dollars on

more monetary and fiscal policy," Kaplan said. 

     Permanent economic scarring and the job rebound depend on health practices

and how the U.S. manages a transition to post-virus economy, Kaplan said. The

"jury is still out" on whether many small businesses will be forced to close for

good during the downturn, he said.

     "It had been our view, based on employment data, looking at credit card

data, other high-frequency data, that the economy was bottoming, are bottomed

out to some extent, during the early part of May," Kaplan said in a webinar with

the Reinventing Bretton Woods Committee. 

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

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