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Dallas Fed President Robert Kaplan speaks with Yahoo Finance [Transcript]

Brian Cheung
·Reporter
·11 min read

Robert Kaplan, president of the Federal Reserve Bank of Dallas, spoke with Yahoo Finance to discuss the COVID-19 recovery and the future of Fed policy.

Below is a transcript of his appearance on Feb. 12, 2021.

BRIAN CHEUNG: There’s no question that we're not out of the woods yet on the economy, almost 10 million people still sidelined relative to pre-pandemic levels. There's millions still turning to unemployment insurance, as we saw from the Department of Labor yesterday. So to chat about this and how Federal Reserve policy is reacting, we have Federal Reserve Bank of Dallas President Robert Kaplan here on Yahoo Finance. Good morning, President Kaplan.

ROBERT KAPLAN: Good morning, Brian. Good to be with you.

BRIAN CHEUNG: So I want to kick things off with just where you think the labor market stands. We saw some more statistics on Friday and this week. How far away are we from maximum employment at the moment?

ROBERT KAPLAN: We're still quite a ways away from maximum employment and it's not surprising to us that January and probably wouldn't surprise me February, even parts of March, we're going to have a sluggish improvement in labor markets. And the reason for that is still — while hospitalizations and cases are improving, we still got a wide prevalence of the virus and so that's limiting mobility and engagement. So we have a long way to go to not only get the unemployed back to work, but to get people who are working part time who would prefer to work full time, people who are discouraged and given up participating in the labor force. And part of that group by the way, are women with children who disproportionately left the labor force since this pandemic began.

And I'm also thinking of low income workers who most likely work in the service sector, who've lost their jobs, and may not have jobs to go back to. And they need to get re-skilled to find new jobs. So I think all that is going to be challenges and work that needs to be done.

BRIAN CHEUNG: And now President Kaplan, it's interesting, because Chairman Powell was speaking about this in remarks this week and there is indication that the market for labor is structurally changing. When you look at things like prime age labor force participation, it's actually been staying the same at around 81% since the summer last year, despite the headline unemployment rate going down. Does that mean that the maximum employment line is kind of now, higher than the pre-pandemic let's say 3.5% unemployment rate that we saw before all this?

ROBERT KAPLAN: I'm not convinced of that at all. I think we know that a lot of jobs have been lost from the service sector, particularly person-to-person contact industries: restaurants, airlines leisure, entertainment. And so I think we're gonna get a very different look at the labor force once we vaccinate enough of the population to see mobility and engagement dramatically improve. And I think when we see that, I think we'll get a much better picture of what the structural issues are in the labor market. There's no question though that many businesses are using more technology than they have in the past, you're going to travel less. They're replacing people with technology. Disruptive platforms are growing. There's no question about all that. But I still think there'll be plenty of jobs, I think the big challenge will be many people who are out of work are going to have to get re-skilled and I think we can do it, but we've got to beef up skills training to get those people re-skilled.

BRIAN CHEUNG: So let's shift the conversation over to inflation, the other side of the Fed’s dual mandate. We saw a core consumer price index come in at 1.4% year-over-year, where do you see price pressures and what is your timeline for the Fed to see 2% inflation?

ROBERT KAPLAN: So, in the short-run, or medium-term, I mean over this next year, it wouldn't surprise me if we see more price pressures. And some of it will be because of supply outages and I'm talking about chips, semiconductors, wood products, metals, packaging products. Those will get resolved over time, but in the short run, you'll see more price pressures there. I would expect, you're going to see, I hope you we’re going to see more wage pressure as again mobility, engagement improves, businesses more fully reopen.

But I think the jury's out on how much of this inflation pressure is going to be persistent, because you've got a counter trend, which is technology and check technology-enabled disruption, to some extent globalization. That's limiting the pricing power of business. So actually I think we're gonna have to see how things evolve, obviously our objective is to average 2% inflation, but I'd be hesitant to put a timetable on when we're going to ultimately reach that goal.

BRIAN CHEUNG: Now where you sit down in Dallas you obviously have a very good view of the oil and energy industry. Is some of the price pressure also because of crude oil, we're looking at the contribution of maybe crude oil raising prices because, the price for a barrel have gone up quite substantially over the last month? Has that been a part of it?

ROBERT KAPLAN: It will be a part of it. And it would not surprise me to see oil prices globally firm further gasoline prices firm further. And one of the things that's happened is capital has gone away from fossil fuels. It's gone heavily into alternatives: battery storage, solar, wind, etc and that's going to continue. But the oil and gas industry is capital starved. They've cut back capacity they've consolidated, they de-leveraged and they promise their shareholders that when they do have more cash flow they're gonna return more, they'll return more of it to shareholders, rather than drill. And so because of that, we're expecting at the Dallas Fed, production will be basically flat in 2021, with 2020. And this is going to go on while we expect demand, ideally, as we get through the year, is going to improve here and globally. And so you can see some price pressures there.

But I think that's a part of a much bigger puzzle in terms of prices. And again, I think that the fullness of time, some of these supply issues will get worked out, but in the short run, it wouldn't surprise me to see some price pressures, like what we just discussed.

BRIAN CHEUNG: Now part of that puzzle though, yes, it might be supply chain shortages, might be energy prices, but it seems like when you talk to anyone about inflation, it seems like people are worried over the longer term about what might be the impact of $1.9 trillion in stimulus. I don't need to point to an op-ed from a specific person to kind of illustrate that point, what's your view on what $1.9 trillion would do to inflation? Would it really risk overheating the economy?

ROBERT KAPLAN: Listen, our forecast here at the Dallas Fed is we're going to have very strong growth, ultimately in 2021. It'll be back-end loaded toward the latter part of the year. Bigger potential fiscal stimulus will even further strengthen that. And again, it's no question, fiscal stimulus and reopening are going to strengthen cyclical forces. But I can tell you, the structural headwinds of technology, technology-enabled disruption are also strengthening. So how that plays out I think it's not going to be as clear as it might have been 10 years ago or 20 years ago, where you'd be confident that you'd have strong growth, tighter labor force, wage pressure, the wage pressure would lead to pricing pressures.

I think that dynamic has changed because of technology, as well as to some extent globalization. And so I'm one of the ones who's humble — we think it's wise to be humble and say, I think we're gonna have to track how this unfolds and I'm not sure, I think the jury's out on how these cyclical versus structural forces play out.

BRIAN CHEUNG: Now at the same time it does seem like that discourse has really gained a lot of steam in the past few weeks about whether or not there is a real risk of the economy overheating. What types of tools would the Fed have to deal with that? Or is that really not part of the biggest concern that the Fed has right now - that it's really just kind of a labor market, allowing that to run hot, that is the primary focus right now?

ROBERT KAPLAN: Well, no, we look at a whole range of factors and I look at a range of factors. So we just talked about inflation. The other thing though I look at very intently is financial stability and particularly excesses and imbalances, which for me means excess risk taking, particularly in non bank financials and the non bank financial market. We have a pretty good, and not perfect, but pretty good grip on banks with capital requirements and stress testing. We don't have as good a visibility on non bank financials and stress testing in non bank financial markets. And what I do want to watch and am concerned about is: people put on more and more risk. It looks benign, until you get some type of increase in volatility, credit spreads widening, higher rates, or other developments that cause people to want to de-risk and do it rapidly. And I worry about the build up of those excesses and imbalances and I'm watching that very intently right now.

BRIAN CHEUNG: So let's then contextualize that within Fed policy right now you have interest rates near-zero quantitative easing until you see “substantial further progress” on your dual mandate goals. But it was interesting - you dissented in the September meeting, rather. You suggested that there should be maybe more “flexibility” after achieving those dual mandate goals. And I know you see that as far away from right now, but what is the concern from your end about the policies that the Fed has put in place and maybe about being too accommodative?

ROBERT KAPLAN: Well, so there's two pieces to what we're doing: one is while we're in the teeth of the pandemic, which we are, we're not out of the woods yet by a long shot. I've been an advocate that we ought to be aggressive on the Fed funds rate, and on our asset purchases, and before earlier in this pandemic, and on these 13(3) programs, some of which have elapsed. And my question is: once we've weathered the pandemic, and we've gotten beyond it and put in the rearview mirror, I don't know when that will be, but it is going to depend heavily on vaccinations and reopening the economy and people being willing to be more mobile, engaged in a broad range of activities. When that happens, and we're making good progress on our inflation and full employment goals, I think we'd be far healthier to be weaning — first off, asset purchases, and then beyond, as we get through that, weaning off some of these other extraordinary measures. And I think we'll be healthier and in a more resilient economy if we do. And part of the September dissent on my part was not the debate about what we do while we're in the pandemic, it was a debate about after we get beyond it, wanting to have flexibility, if necessary to make the adjustments we need to make sure to help wean the economy off some of these extraordinary measures.

BRIAN CHEUNG: Alright, well if we do get to that point, we'll definitely have you back here on Yahoo Finance. The Dallas Fed President Robert Kaplan, thank you so much for joining us this morning.

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