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Jackson Hole 2021: Dallas Fed President Robert Kaplan speaks with Yahoo Finance [Transcript]

·Reporter
·14 min read

Robert Kaplan, president of the Federal Reserve Bank of Dallas, joined Yahoo Finance on the virtual sidelines of the annual Jackson Hole symposium to discuss the impact of the Delta variant on the U.S. economy and how the Federal Reserve is responding.

Below is a transcript of his appearance on Yahoo Finance Live on August 26.

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BRIAN CHEUNG: Thanks Seana, joining us now on Yahoo Finance in a live interview is the Federal Reserve Bank of Dallas President Robert Kaplan, thank you so much for joining us this afternoon President Kaplan. Just want to start things off with the big looming shadow over the Jackson Hole Symposium, which is going to kick off tomorrow, which is the Delta risks so just wondering to kind of start off there, what is your outlook on the economy with the rising COVID cases that we've seen?

ROBERT KAPLAN: So with this resurgence, we've been redoubling our efforts to talk to contacts to do real-time surveys, look at high frequency data. And what I'm seeing is, in certain sectors, as you would expect, travel-related, you're seeing weakness in some other sectors but by and large, predominantly, what we're seeing is resilience across the indicators that we look at. Mobility engagement over the last week, for example, that hasn't gotten better, but it hasn't deteriorated. I'm hearing from businesses broadly that they're weathering this resurgence either about the same as previous resurgences or somewhat better. And I think what we're learning is businesses and consumers are learning that COVID may well be a fact of life. There’s going to be fits and starts, and I think they're learning to adapt to this.

BRIAN CHEUNG: So obviously the million dollar question right now — or maybe the perhaps $8 trillion question right now — is about tapering. I know you've been thinking about this for a while, I'm sure you've been asked this a million times, but how does Delta impact your thinking on the possible timing of pulling back on the Fed's $120 billion-a-month pace of asset purchases?

ROBERT KAPLAN: So we're going to continue, and I'm going to continue, between now and the third week in September, which is the date of our meeting, I'm going to be continuing to very closely monitor how the economy unfolds. But if it continues to be the case that I'm not seeing anything that would materially change my outlook, and I'm continuing to see progress in the economy, it might be slower in some places, the mix may change, the timing may change. I think the matching of workers to jobs may slow a bit, but if it doesn't fundamentally change my outlook, I'm going to be suggesting that we should move toward announcing a plan as early as our September meeting and beginning our tapering process in October.

BRIAN CHEUNG: So we are still going to get some data in the month leading up to that meeting. We're going to get a jobs report next Friday. we're getting a read on Personal Consumption Expenditures tomorrow morning in fact. So is there a relatively high bar for what you need to see there to reconsider where you're kind of placing that timing of September?

ROBERT KAPLAN: So, one thing about these purchases: they were very effective and very critical in 2020 and in early ‘21, before we had vaccines. They are very well designed to stimulate demand, they're not so well designed for the situation we have now, where a lot of our challenges are supply-related. And so, that's a factor that I'll have in my mind. And I'm concerned about some of the excesses and imbalances that these purchases create in risk-taking in the housing market, which can ripple into higher rents. And so my going-in view is these purchases had their purpose and their time, but they're not well suited to the environment we're in now. And then I'm going to combine that, which is to continue assessment to see if they're continuing to make progress in the economy. And I want to make sure that there's nothing that fundamentally changes my outlook. My best judgment is that may likely be the case. So when I combine both those things, those are the two issues, I'll be thinking about.

BRIAN CHEUNG: So you brought up financial stability, this is part of the Fed’s framework as well, making sure that you're not allowing any sort of asset bubbles to inflate. You mentioned housing, but I guess people have pointed out that the housing market in 2021, which is hot by all standards, is not the same necessarily as the one that led to 2008, because savings are actually higher on households because of the stimulus that was put out by fiscal agents. So I guess, what is your concern, and does that relate also to the fact that part of the Fed’s purchases on a monthly basis are on the mortgage backed security side of things?

ROBERT KAPLAN: Yeah, so I'll start with housing and then I'll talk about financial markets generally. On housing, we have a historically elevated housing market. There's a number of good reasons for that, including people preferring to live in homes, moving from cities to suburbs, a whole range of factors. I guess my point is, with this elevated level of house prices, what you normally see with some time lag is that ripple effects into higher rents, which predominantly affect low, moderate income communities. I'm not saying right now that we're in a bubble. I think this situation bears watching, but I don't think the housing market needs any further support from the Fed, I am saying that, with either Treasury or mortgage-backed securities purchases. And on financial markets. I think you're seeing people move along the risk curve. There's more risk taking, particularly in the non-bank financial markets. I think when you look at credit spreads, real yields are historically low. And those are some of the side effects, that are going to ultimately need to get normalized. It will be much healthier if we wean off these purchases soon, 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.

BRIAN CHEUNG: President Kaplan, do you have any thoughts about the way about what you're going to taper? Would you prefer to have it done after a certain period of time? Would you like to bias those slowed down more on the mortgage-backed security side of things, given what you just said, as opposed to the U.S. Treasury side of things?

ROBERT KAPLAN: I would suggest that we should do Treasuries and mortgage-backed securities ratably. And I think the Treasury purchases are having a significant effect, in conjunction with mortgage-backed purchases on the housing market. So I would do them ratably. And my base case of what I propose is that we do this adjustment gradually. And for me, gradually means approximately eight months. And so that would be $10 billion of Treasuries and $5 billion in mortgage-backed securities a month. And I think from a risk management point of view, doing it gradually, there needs to be some adjustment by the markets that gives the markets time to make that adjustment.

BRIAN CHEUNG: So, let's talk about inflation. Again as I mentioned, we are gonna get that PCE report tomorrow, but I have a Dallas-specific question which is, you know you have a great vantage point on the oil side of things. Now of course, when you take core PCE, you're stripping out that volatile component, but it's worth pointing out that a barrel of crude oil has come down quite a lot over the last two months or so, when we saw $75 earlier in the summer. Now it’s actually dipped as low as below $63, so do you think that there's any sort of bleed-through when it comes to commodities prices and the way that producers and sellers are pricing their products? And do you think that's supportive of the transitory or the persistent story with regards to inflation?

ROBERT KAPLAN: So in talking about inflation, I'd rather broaden it beyond oil because I think oil is an element. But in this case, maybe not as substantial element of the issue, our own forecast at the Dallas Fed is that we'll end the year with headline PCE inflation — Personal Consumption Expenditures inflation — 3.8% or 3.9%, but that as we head into 2022, we're going to see some of these extreme moves moderate. Used car prices is a good example. We expect that to moderate. The issue is, we also expect a broadening of price pressures. So that headline PCE inflation next year, we think is going to be in the neighborhood of 2.5%, and there's risk that could be higher. And so we think some of these supply-demand imbalances for materials, some of them will not moderate, but some of them are going to persist longer than people think. And we do think that the labor market is much tighter than the headline statistics indicate. We've had 3 million retirements since February 2020. About another million [and] a quarter, million [and] a half people have left the workforce to be caregivers, primarily working mothers. I'm hopeful some percentage of those folks will come back, but I think that's a question. And we still have fear of infection. And so I think you're going to have labor supply demand issues and difficulty in hiring workers. I think that could go on for an extended period of time, which is going to broaden some of these price pressures. And businesses I talked to are a lot more confident right now. They're planning to increase prices and they're a lot more confident that they'll be able to increase prices. So I think that's the issue I'm watching that we're gonna have to manage at the Fed.

BRIAN CHEUNG: So you bring up the labor market and you say that it's tighter than maybe it suggests and I want to bring up the labor force participation rate, because it hasn't broken 62% through this recovery and that's a bit of a fall from the above 63% that we had pre-pandemic so when you talk about those 3 million people who maybe have left the labor force, is that structural damage that you think has changed the definition of labor market tightness in this post-pandemic economy or are you suggesting that we’ll still have to have the opportunity to get labor force participation, even further from where we are.

ROBERT KAPLAN: Yes, so in the aftermath of the Great Recession, what we saw is people — their homes were underwater, they had debt, and many people postponed their retirement, and they extended their working careers. OK. We're seeing, and — I used to say pre-pandemic. We're expecting, all things being equal, at the Dallas Fed, that due to aging, the workforce participation rate over the next several years is going to trend lower from say 63%, which is where we were right before the pandemic, to something in the neighborhood of 61%. The pandemic hit, and what we saw is, people saw their home prices appreciate. They had decisions. They didn't want to go back to the office, and we saw a lot of these pent-up retirements happen, but I don't think that's the end of the story. I think we've got an aging workforce. And so we're expecting the participation rate to be challenged in the years ahead because we have an aging workforce and more and more people over 55 years old are going to choose to retire. And so I think this may well be a more persistent problem. And so, we're expecting some improvement in the participation rate. I'm hopeful over the next year, but 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.

BRIAN CHEUNG: But right at the end of the day, I mean, there is still a massive shortfall when it comes to the amount of people in the labor force compared to pre-pandemic levels. But I guess I want to ask you about how that matches up with what the Fed’s trying to do with this framework. I did do my research, I knew that you told a competitor outlet earlier in the day that inflation affects communities disproportionately. I guess the other side of the coin, though, is that employment also affects these communities, right. You want to get people who are out of jobs back into the labor force, we know these communities are hard hit. So is there a risk of a trade-off, that as the Fed thinks about normalizing — and I understand tapering and interest rates are different — but that you can, OK, maybe address the inflation side of things, but at a time where the labor market maybe hasn't gotten the accommodation that it needs to get everyone back.

ROBERT KAPLAN: So, let's talk through this. Over the 10 years leading up to the pandemic, the Fed had a history of trying to balance creating full employment, but also price stability. What we learned in the years leading up before the pandemic, is we were able to run the economy much hotter, because of technology-enabled disruption, globalization, limited pricing power of business. And we were able to get the unemployment rate much lower. And so we reflected that in our new framework, which I support strongly. We said we're gonna be less preemptive in the future and anticipate inflation in service of trying to have a more inclusive, fully-employed workforce, which has a lot of benefits for society and I believe in that strongly.

However, with that new framework, we still have a commitment to anchoring inflation at 2%. We're willing to run inflation moderately above 2%. But we still have an inflation mandate, the price stability mandate. So, yeah, what you're seeing right now, we're seeing an unprecedented shutdown and recovery. There's no textbook for it, we're trying to understand it. I talked about these labor supply demand issues we have with material supply demand issues, and we're trying to as thoughtfully, and I'm trying to as thoughtfully as I can, balance the desire to create full employment, a more inclusive workforce, and really reach our potential on that, versus also trying to make sure we reach our commitment to have price stability.

And what I'm saying about low-, moderate-income communities: it's critical that they're more fully-employed. It's critical we do everything we can to improve their employment. And that includes, by the way, encouraging early childhood literacy, skills training, all the things that help them get employed. But what I'm also hearing from the same communities is, don't forget about the fact price stability is a big part of inclusive prosperity in that low-, moderate-income communities spend a greater share of wallet on gas, cars, rents. And so we just have to balance both.

BRIAN CHEUNG: And then lastly, you will have to fill out a plot projection in a month. And you're giving clues on how you're thinking about the timing of that first liftoff.

ROBERT KAPLAN: I’ll make that decision in September. I've said publicly in the June submission that my first rate increase was 2022. On the one hand, I don't see anything that is likely to change my submission materially from June. Having said that, I've also made the point: the decision to adjust asset purchases I think should be separated from considerations on the Fed funds rate. Meaning, because I would like to start asset purchases soon, does not mean or indicate where I am on the funds rate. That's a decision we'll make down the road, based on economic developments. And I actually think acting sooner on asset purchases may give us [the] ability to be more flexible and patient on the Fed funds rate down the road. But I'm separating those two decisions.

BRIAN CHEUNG: Optionality on those two separate tools, but again the Federal Reserve Bank of Dallas President Robert Kaplan, thanks for hopping on Yahoo Finance this afternoon, hopefully see you in person again next year.

ROBERT KAPLAN: Look forward to seeing you.