A Fictional Dialogue with Robert Kaplan of the Dallas Fed

Note: I wrote this post at least a week ago. More recently Janet Yellen -- a former Federal Reserve boss --  started to back away from low interest rates -- but then changed her mind. So as I write today, the Fed and the Treasury seem united in thinking inflation is not a threat and preferring to stick with near-zero interest rates. 

Below I pulled some key words from a WSJ article* about Robert Kaplan's Policy views. My comments below are in italics after .............. 

Federal Reserve Bank of Dallas President Robert Kaplan said it isn’t time for the central bank to pull back on its support of the economy, but paring stimulus when it becomes clear the coronavirus pandemic is abating and the economy is meeting the Fed’s goals will be important to keep the recovery on track..........when will it become clear? Might they wait too late?

When we’re in the middle of a crisis, we should be aggressively using our tools, so I agree with what we’re doing now in terms of asset purchases and stance of policy generally, .............are we really in the middle of a crisis?

Mr. Kaplan declined to give a timeline for when those conditions might be met. The official remains upbeat about the economy and forecast 6.5% growth this year, with the jobless rate dropping to 4% this year....the jobless rate is dropping to 4% and he says we are in a crisis? When will he know when the economy is strong enough so they can begin to pull back all that stimulus?

There’s reason to be optimistic about the future,” the official said, adding, Having said that, I would also emphasize it is my view that we’re not out of the woods yet............I repeat, when will he know we are out of the woods? When will he want to take his foot off the accelerator?

Determining when the pandemic has largely passed is a conversation that will take place in conjunction with health policy experts. But once clarity on that question emerges, the Fed should trim its support to keep it commensurate with what the economy needs........Is Dr Fauci going to run the Fed? When will Covid's future be clear?

I reserve the right to change my mind, and update my views depending on how the economy performs, Mr. Kaplan said Tuesday........wow -- now that's a commitment to a clear policy we can bank on. 

Market excesses and imbalances can seem benign while it’s going on, but if it goes too far, if you have somewhat of a shock or an adjustment or you’re getting back to normal and people need to some extent de-risk, it can create a severe tightening in financial conditions which can slow the economy,” Mr. Kaplan said.......okay now he is honest but that honesty does not go with his policy view. Yes, it will hurt if you hit yourself in the head with a hammer -- but go ahead and keep hammering. You will know when to stop hitting yourself in the head.

That is why at some point it will be important for the Fed to trim back support, the official said.....how do we know when we are at that point? How will he know? Seems to me we are there already. 

All things being equal, I am going to be much more willing to be accommodative or highly accommodative in the months and years ahead in order to achieve our goals,” Mr. Kaplan said, ....aha. Months and years. Years? Really? Sounds to me like he is never going to judge the economy to be healthy. And as he said -- then the fit will hit the shan. 

*https://www.wsj.com/articles/feds-kaplan-says-the-economy-still-needs-central-bank-support-11617787800?mod=hp_lista_pos2