Kaplan Says Fed Will Avoid 2013 Taper Tantrum This Time Around

(Bloomberg) -- The Federal Reserve’s tapering of its asset purchases, which he hopes will start “soon,” will run smoother this time around because investors already know that a move is being discussed, said Federal Reserve Bank of Dallas President Robert Kaplan.

“I want it to get out into the market, and I think this debate we’re having at the FOMC, some of it publicly, is good,” Kaplan said Wednesday in an interview with Michael McKee on Bloomberg Television, referring to the Federal Open Market Committee. “People are on notice that these adjustments are coming, the only question is when.”

Kaplan said the Fed learned a number of lessons in 2013, when it first announced a slowing its purchases of Treasuries and mortgage-backed securities following the global financial crisis. The news caused a violent spasm in financial markets as investors sold riskier assets for the safety of bonds in an episode dubbed the “taper tantrum.”

The central bank has been purchasing $80 billion of Treasuries and $40 billion of MBS monthly since last year to support the U.S. economy during the pandemic. Chair Jerome Powell said earlier this month that the taper debate was getting into gear and would continue at coming FOMC meetings.

Kaplan said the purchases were useful when the pandemic drastically weakened consumer demand as millions lost jobs and businesses shuttered.

The economy is now grappling more with supply-side issues, with employers struggling to find workers and several industries facing logistical problems in getting their products to market -- problems the Fed’s bond buying isn’t well suited to help ameliorate.

“These purchases are very adept at stimulating demand, but we’ve got plenty of demand,” Kaplan said. “Our problem is supply, and these purchases are not very effective when you’ve got a supply issue.”

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