Federal Reserve Bank of Dallas President Robert Kaplan said rising concerns over the spread of the Delta variant have not materially changed his call to start the process of pulling back on the central bank’s extraordinary monetary stimulus in September.
“I’m going to be suggesting that we should move toward announcing a plan as early as our September meeting and begin our tapering process in October,” Kaplan told Yahoo Finance in an interview on Thursday.
Kaplan’s comments come as the policy-setting Federal Open Market Committee weighs the timing of taking the first steps in slowing its accommodative monetary policy, which has involved near-zero interest rates and a “quantitative easing” program that is currently absorbing about $120 billion in assets every month.
Kaplan said he will still watch incoming data ahead of the next policy-setting announcement on Sept. 22, but feels that stimulating demand — a key purpose of the QE program — is unneeded given how supply issues appear to be the bigger problem.
The Dallas Fed chief said if anything, those asset purchases are creating “excesses and imbalances” in the housing market, where home valuations have ripped higher. Kaplan said the market does not look like a bubble, but said he worries about the impact of the Fed’s QE program — which buys U.S. Treasuries and agency mortgage-backed securities (MBS).
“It will be much healthier if we wean off these purchases soon,” Kaplan told Yahoo Finance. “I think we’ll be in a much better position down the road, and have a healthier recovery if we wean off some of these purchases and remove some of these probably unintended side effects.
Kaplan said he would like to structure the taper to happen over about eight months, which would be slowing the pace of its Treasury purchases by about $10 billion a month and its agency MBS purchases by about $5 billion a month.
His remarks echo those of Kansas City Fed President Esther George, who told Yahoo Finance Wednesday that she thinks it is “time to begin to ease back” the central bank’s aggressively supportive stimulus.
Kaplan and George are only two of the committee’s 18 members, meaning that it is still unclear if the committee will ultimately vote to announce a taper in its next policy-setting meeting on Sept. 22.
Neither Kaplan nor George are voting members of this year’s committee, which rotates policy-deciding votes among the regional bank heads each calendar year.
On inflation, Kaplan said he continues to expect that headline inflation (measured in Personal Consumption Expenditures) to clock in at 3.8% or 3.9% for 2021. But as categories like used car prices moderate, Kaplan said he expects that to fall to “the neighborhood of 2.5%” next year, adding the caveat that it could be higher if supply bottlenecks aren’t resolved.
On the labor market, Kaplan said he is hopeful that the economy will see a return of some portion of the nearly 6 million people who are out of the labor force compared to pre-pandemic levels. But Kaplan said at least 3 million of those people are likely lost to retirements and shifts to become caregivers.
With an aging workforce, Kaplan said he’s not optimistic that the labor force participation rate, currently at 61.7% as of July, can return to the above 63% levels of pre-pandemic times.
“I’m not expecting it to get back to where we were because of this demographic issue, it’s really a structural issue that I think is going to be with us for an extended period of time,” Kaplan said.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.