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Dallas Fed’s Kaplan Says Rebound Likely in Second Half

Federal Reserve Bank of Dallas President Robert Kaplan said Monday he believes the U.S. economy can recover over the second half of the year, but the pace of that recovery will be in part determined by how disciplined people are in following measures to prevent the spread of the coronavirus.

The economy is in for a historic hit in the second quarter but will grow in the third and fourth quarters and reduce a double-digit unemployment rate, Mr. Kaplan said in a video appearance before an economists group.

“You’ll see substantial job growth, I believe in June and July, and through the summer,” Mr. Kaplan said, noting the U.S. is likely to end the year with unemployment at 8% or higher, compared with 13.3% in May. The unemployment rate surged from February’s 3.5% as broad swaths of the economy shut down as the U.S. attempted to reduce the spread of the coronavirus.

“If people wear masks widely, if we have extensive testing, contact tracing, if businesses and individuals follow good procedures, we’re going to grow faster,” Mr. Kaplan said. But he added, “I’d say our practices have been far more uneven than other countries.”

Mr. Kaplan also said that massive deficits tied to government support efforts responding to the pandemic have been appropriate, but he joined with some other Federal Reserve officials and said eventually the red ink will need to be reduced.

Mr. Kaplan also weighed in on the outlook for future ways the Fed could provide support to the economy, noting that if the central bank were to use more so-called forward guidance to shape the public’s expectations about interest rates, he would like it to be tied to how the economy performs, as opposed to flagging a date through which rates will not change.

The Dallas Fed leader and voting member of the rate setting Federal Open Market Committee also said he is not sold on so-called yield curve control, in which the Fed buys bonds in a bid to more strongly influence the cost of borrowing across different time frames. Some see this as a valuable tool for the Fed in an environment where its short-term rate target is already at near zero levels.

“We have to weigh the costs and the benefits and right now I’m in the stage, for me, of having a little skepticism but wanting to continue to explore it,” Mr. Kaplan said. “I worry about going too far in terms of distorting the pricing mechanism of the Treasury curve. And I’m not saying we shouldn’t do it, but I think I’d have to see evidence that there’s a reason to do it.”

In separate remarks, San Francisco Fed leader Mary Daly said the economic impact of the coronavirus pandemic has been borne by workers least able to bear it and they can’t be left behind.

“We need to focus on investments that leverage the talent of everyone and contribute to the economy’s long-term growth prospects,” Ms. Daly said. “Inclusive growth is faster growth — and it will pay for itself in the long run.”

“I expect our current stance of highly accommodative monetary policy to continue until the economy has largely recovered what’s been lost due to the virus,” Ms. Daly added, noting that “with the current low inflation environment expected to continue, we can once again search for the upside potential of our full employment goal.”

Ms. Daly told reporters after her remarks that risks of an inflation surge remain low and she is not yet expecting any permanent dislocations in labor markets due to the pandemic. Ms. Daly, who does not currently have an FOMC vote, said that as things stand with the economy and the prospect of additional central bank actions, “I don’t know if we’ll need to do more but we should be prepared to do more.”

Ms. Daly also said the yield curve control strategy that Mr. Kaplan expressed some concern about is a long-shot for the Fed and other tools are likely to be used first.
Source: Dow Jones

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