President of the Federal Reserve Bank of Dallas, Robert Kaplan
President of the Federal Reserve Bank of Dallas, Robert Kaplan

Sticking with stimulus for too long could be harmful Fed’s Kaplan says

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Keeping the extraordinary monetary policies prompted by the Covid-19 crisis “too far time-wise”
could be harmful to the economy, President of the Federal Reserve Bank of Dallas, Robert Kaplan, stated on Friday.

The policymaker asserted that if sticking with “the excessive accommodation,” there will be “side effects” and explained that it is better “to err on the side of starting to remove” the policies “sooner rather than later.”

The official underlined that such move must come only after it has been established that the Covid-19 “has been weathered.” Some progress has been made in regard to both the inflation, and employment in the country, he concluded.

“You don’t want to be preemptive, but I also don’t want to be so reactive that we are late,” he said in a virtual appearance at the Engage Undergraduate Investment Conference.

Kaplan “will advocate” for pulling back on “some of the Fed’s extraordinary actions,” starting with trimming the Fed’s bond-buying program.

Federal Reserve Interest Rate
US Fed Funds Rate 0-0.25% (March 2021)

The Fed left the target range for its federal funds rate unchanged at 0-0.25% during its March meeting, and signalled a strong likelihood that there may be no rate hikes through 2023. The central bank also decided to keep purchasing $120 billion a month in bonds until “substantial further progress” is made toward the Fed’s goals for inflation and maximum employment.

Minutes from the last US Federal Reserve (Fed) meeting released Wednesday (April 7) underscored its commitment to low interest rates for “some time”.

The U.S. economy could grow by 6.5% in 2021 and the unemployment rate could approach 4% by year end, Kaplan said. “Once we do emerge, we’re going to have very robust growth,” he added.

According to a new forecast released Tuesday by the International Monetary Fund, the U.S. economy will grow 6.4% this year, its strongest growth in decades. That’s faster than the 5.1% growth the global lender was projecting just two months ago and nearly double the growth rate it predicted in October.

“This makes the United States the only large economy projected to surpass the level of GDP it was forecast to have in 2022 in the absence of this pandemic,” Chief Economist Gita Gopinath wrote in an article on the IMF Blog, accompanying the release of the forecasts.

Still, risks remain. First-time claims for U.S. unemployment benefits unexpectedly increased in the week ended April 3rd. The Labor Department on Thursday (April 8) said initial jobless claims edged up to 744,000, an increase of 16,000 from the previous week’s revised level of 728,000.

Jobless claims rose for the second straight week after falling to a one-year low of 658,000 in the week ended March 20th. The continued increase surprised economists, who had expected jobless claims to drop to 680,000 from the 719,000 originally reported for the previous month.

Unemployment is still 6%, a level which is historically elevated.  Higher inflation readings this year could also raise the market’s anxiety level over the timing of the Fed’s pivot toward tapering its stimulus.

For how long will Fed policy remain more helpful than hurtful? The economy is now on life support. The biggest challenge is to bring it back from life support.