Fed’s Kaplan Says U.S. Recovery Faces Upside And Downside Risks

Federal Reserve Bank of Dallas President Robert Kaplan said it’s possible the U.S. economy recovers faster than expected, but the performance will depend on public health
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“There’s downside risk to the recovery and there’s upside,” Kaplan said Tuesday in an interview with Bloomberg Television’s Kathleen Hays. Which one will prevail “is going to have less to do with monetary and fiscal policy and a lot more to do with how effectively we execute the healthcare policies. How well we do that will determine how fast we grow,” he said. “But there’s certainly an upside case.”

Kaplan sees the economy contracting 4.5% to 5% this year, but said that the downturn likely bottomed out in early May. Jobs reports will be strong in the next few months, but unemployment will end the year at 8% or more, from 13.3% in last month and will remain elevated through the end of 2021.

Yield-Curve Control
Negative rates, which have been used by other major central banks around the world, may not be effective at helping growth in the U.S., Kaplan said. The Fed kept its benchmark interest rate near zero at its policy meeting last week and signaled it expects to keep it there through 2022. Kaplan added that yield-curve control might be worth examining if there was evidence of strain in Treasury markets.

As part of its emergency measures to help the economy recover from he pandemic, the Fed is buying corporate bonds, which some market observers have warned may help prop up companies that were too highly leveraged going into the crisis.

“I said before this crisis that record amount of corporate debt would be an amplifier in a downturn and in my view it has been an amplifier of this downturn,” Kaplan said. “We should do what we can in the middle of this crisis, but as we start to emerge from it I think it’s wise to show restraint in some of these actions that affect markets” because it could encourage risky investor behavior.

Kaplan is a voter this year on the interest rate-setting Federal Open Market Committee.

This article was provided by Bloomberg News.