© Bloomberg. Robert kaplan
(Bloomberg) – Federal Reserve Bank of Dallas Chairman Robert Kaplan said he was dissenting at the central bank’s September meeting so future policymakers would not be forced to keep rates close to zero .
“I would like future committees to have the flexibility to adapt to these future economic conditions so that they can use their best judgment in deciding the appropriate direction of monetary policy,” Kaplan wrote in a letter released Tuesday.
The letter sets out his reasons for dissenting as well as his views on the economy and energy markets. Kaplan also said he was skeptical of the benefits of further forward guidance at this time.
Kaplan sees the economy shrink 3% this year and grow 3.5% next year. The inflation rate for basic personal consumption will increase by 1.6% at the end of this year and by 1.8% at the end of next year. The unemployment rate will fall to 5.7% by the end of 2021.
Kaplan was one of two dissenting voters at the September 15-16 Fed meeting, where policymakers adopted a more conciliatory tone. They signaled that rates would stay close to zero until 2023 and adjusted their post-meeting statement to reflect their new strategy of allowing inflation to rise above 2% after periods of underperformance.
Minneapolis Fed Chairman Neel Kashkari has spoken out in favor of waiting for a rate hike until “core inflation hits 2% on a sustained basis.”
Kaplan said he expects it will be appropriate to keep interest rates close to zero until the economy is on track to achieve maximum employment and average inflation of. 2% over time, which will take until the end of 2022 or “sometime in 2023”. As the economy moves closer to those benchmarks, keeping rates close to zero may mean that policy actually becomes more accommodating, he wrote.
“I can understand why future committees will want to stay accommodating at this point in order to ensure that we meet our goals, but will they want to effectively raise the standard of accommodation by keeping the federal funds rate at zero?” Kaplan wrote. “I would like future committees to have the flexibility to make this judgment.”
He also said low rates punish savers and encourage greater risk-taking, creating distinctions in financial markets. Kaplan is voting on the Federal Open Market Committee this year, but the Dallas Fed will not do so until 2023 under the reserve bank rotation system.
Read more: Fed’s Kaplan, wary of bubbles, dissenting to preserve flexibility
Kaplan said officials learned during the last recovery that the unemployment rate can drop much lower than expected without triggering excessive inflation, and that such a tight labor market can bring back previously marginalized workers.
The coronavirus pandemic has hit these people the hardest, Kaplan wrote. Unemployment rates for blacks and Latin Americans climbed to much higher levels than those for white Americans during the height of the crisis, and remain at high levels today.
“These disparities are indicative of how the pandemic has disproportionately impacted person-to-person service jobs and those with lower levels of education,” Kaplan wrote. “These statistics reinforce the need to redouble efforts to invest in education and vocational training to create a stronger and more inclusive labor market and to help ensure that key groups in our society are not left behind. in this recovery. “
He added that if Congress did not maintain the additional unemployment benefits, which had supported consumer spending during the early months of the pandemic, and other fiscal stimulus, it “would certainly create headwinds for the continuation. of the recovery ”. Kaplan said supporting state and local governments is also essential, as is helping small and medium businesses access capital.
The Dallas Fed district encompasses the world‘s largest shale oil field, which has seen its production drop dramatically as energy demand wanes this year. Kaplan estimates that production in the Permian Basin will decline to 3.8 million barrels per day in December, from 4.7 million barrels per day last year. The United States as a whole will see a drop to 10.7 million barrels per day from 12.8 last year.
Completed wells will decline by 50% this year, and US capital expenditures on exploration and development will fall by the same amount. Kaplan said oil production is expected to be stable next year.
© 2020 Bloomberg L.P.