Fed’s Kaplan says central bank should start cutting assets in October

Dallas Federal Reserve Chairman Robert Kaplan said on Wednesday that the central bank is expected to start reducing its monthly purchases of Treasury bonds and mortgage-backed securities in October.

His opinion that the Fed should start cutting is perhaps the most ambitious of a Fed chairman to date. Other senior Fed officials, including President Jerome Powell, have yet to give a forecast of when they will want to withdraw the economic stimulus.

“I think if the economy plays out by our September meeting… if it goes the way I hope I would be in favor of announcing a plan at the September meeting and starting reduction in October, ”Kaplan said. .

He told “The Exchange” that he felt comfortable withdrawing the stimulus because he believes the US economy is in the midst of a healthy rebound.

“The reason I say we should start tapering soon is that I think these purchases are very well equipped to stimulate demand. But we don’t have a demand problem in the economy,” he said. he told CNBC’s Steve Liesman. “My thinking is that I would rather take my foot off the accelerator quickly and reduce RPMs.”

“What I don’t want to do is keep running at this speed for too long and then we will have to take more aggressive action on the road,” he said.

He added that the reduction in the Fed’s assets should be separate from its eventual decision to raise interest rates. The downsizing process is expected to take about eight months, Kaplan said.

Kaplan’s ambitious tone is not entirely surprising.

A self-styled “hawk,” Kaplan is among Fed chairmen most often in favor of tighter monetary policy and higher interest rates. Kaplan is not a 2021 voting member of the Federal Open Market Committee, the central bank body responsible for making monetary policy adjustments.

His comments to CNBC came just hours after the Labor Department reported that inflation had held steady at multi-year highs in July. Economists often view rising prices as a symptom of a healthy economy, but too high inflation can suggest overheating business.

The Consumer Price Index, or CPI, rose 5.4% in July from a year earlier, in line with June’s figure and corresponding to the biggest jump since August 2008.

Kaplan said the current price hike is due to the mismatch between pent-up consumer demand resulting from Covid-19 vaccines and overwhelmed supply chains.

President Powell and other Fed officials have noted the recent acceleration in prices, but believe inflation is “transient” and prices will no longer rise at their current rate.

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