Fed’s Kaplan Sees Hike in 2022, Taper Starting Sooner

U.S. dollar banknotes. (Photographer: Sarah Pabst/Bloomberg)

Fed’s Kaplan Sees Hike in 2022, Taper Starting Sooner

The U.S. economy will likely meet the Federal Reserve’s threshold for tapering its asset purchases sooner than people think, said Dallas Fed President Robert Kaplan, who has penciled in an interest-rate increase next year.

“As we make substantial further progress, which I think will happen sooner than people expect -- sooner rather than later -- and we’re weathering the pandemic, I think we’d be far better off, from a risk-management point of view, beginning to adjust these purchases of Treasuries and mortgage-backed securities,” Kaplan said Wednesday in an interview with Bloomberg News.

Kaplan says he’s forecasting rate liftoff in 2022 from its current setting near zero, as inflation surpasses the central bank’s 2% goal this year and next and unemployment dips below 4%. He declined to elaborate on his 2023 rate projection.

Fed’s Kaplan Sees Hike in 2022, Taper Starting Sooner

Fed officials moved up their rate estimates at the June Federal Open Market Committee meeting. The so-called dot plot, a graphical representation of each participant’s rate forecast, showed the median projection calling for two rate increases in 2023, versus none in March. While the median for next year still indicated no rate hike, seven of the 18 participants penciled in liftoff then.

Kaplan is joined in publicly declaring his 2022 liftoff projection by Atlanta Fed President Raphael Bostic and James Bullard, head of the St. Louis Fed.

Fed Chair Jerome Powell, in a press conference following the meeting, indicated that policy makers would start talking about tapering the $120 billion of monthly asset purchases at upcoming meetings. Starting the process sooner would leave officials with more flexibility on future rate increases, Kaplan argued.

“If we do these purchases longer than might be necessary, for me it actually may reduce our flexibility in adjusting rates,” Kaplan said. “I’d rather start tapering, assuming we meet our conditions, sooner rather than later so that we have more flexibility in deciding what we want to do on rates down the road.”

Kaplan sees inflation of 3.4% this year and 2.4% next year. While some price pressures will moderate over the next six months, others may represent longer-term trends. Demand for semiconductors, for example, is likely to increase further as the transition to sustainable energy sources intensifies.

Fed’s Kaplan Sees Hike in 2022, Taper Starting Sooner

But the current data environment, with swings that have been difficult for economists to accurately forecast, requires a “healthy dose of humility,” Kaplan said, echoing comments made by Powell last week.

Market participants saw the Fed’s more hawkish interest-rate forecasts as a way for the central bank to reaffirm its commitment to stable prices following two months of higher readings.

“I think it’s a good thing for the Fed to emphasize that we’re vigilant and we’re committed to anchoring inflation at an average of 2% and that we’re committed to anchoring inflation expectations in a manner that’s consistent with 2% inflation,” Kaplan said. “I think just emphasizing that is probably a healthy thing.”

The moves in Treasury markets following the Fed’s June meeting, with investors buying longer-dated debt instead of short-term bills, may take a few more weeks to wash out, Kaplan said.

Fed’s Kaplan Sees Hike in 2022, Taper Starting Sooner

While noting that a number of people have dropped out of the labor force due to early retirement, Kaplan is optimistic that the participation rate of workers aged 25 to 54 will improve, especially as schools reopen to in-person learning and women, who left the workforce in disproportionate numbers during the pandemic, return to work.

The U.S. labor market needs a “relentless,” multi-year effort in more widespread skills training, increased early-childhood education and access to wi-fi to create better long-term workforce trends, Kaplan said.

“If your workforce growth is slowing or decelerating, you’ve got to try to improve worker adaptability and improve productivity, and education has got to be central to that,” Kaplan said.

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