Federal Reserve Bank of Dallas President Robert Kaplan speaks at the Commonwealth Club, in San Francisco, Calif., on Oct. 11, 2019.ANN SAPHIR/Reuters
Federal Reserve Bank of Dallas President Robert Kaplan on Thursday appeared to add a new pillar to the case he is building for reducing the U.S. central bank’s support for the economy, saying that the labour market is already tighter than many appreciate.
The factors crimping labour market supply “may not be particularly susceptible to monetary policy,” he and several of his economists wrote in a blog on the Dallas Fed’s website.
Though those factors may fade as the year progresses, labour supply may ultimately increase less than expected. “It is our view that this possibility should be kept in mind as policy-makers assess the appropriate stance of monetary policy,” they wrote.
Kaplan has been pushing for the Fed to start discussing a reduction in its $120-billion in monthly purchases of Treasuries and mortgage-backed securities sooner than later, citing risks of excesses and imbalances in the financial markets and the possibility that inflation could surge out of control if supereasy policy continues too long.
In an interview on CNBC Kaplan reiterated his call for doing so “sooner than later,” noting elevated housing prices and suggesting the Fed’s bond-purchases could be fuelling that.
“These mortgage purchases might be having some unintended consequences and side effects which I think we need to weigh against the efficacy,” Kaplan said. “Some restraint and moderation as we move toward weathering this pandemic I think would be useful in mitigating some of these excesses and imbalances.”
A tighter-than-appreciated labour market would be another argument for easing up on the monetary policy gas pedal.
The blog noted “resilient” wage growth and “relatively abundant” jobs, indicating the labour market has less slack than suggested by the fact that the U.S. economy now employs 8.5 million fewer people than before the pandemic.
It’s unclear how many sidelined workers will return. Many have retired. Others are caring for family members, or are worried about their health, the authors said. The extra $300 weekly in unemployment benefits, part of the federal government’s pandemic aid package, may also be playing a role.
The Fed has said it will keep buying bonds at the current pace until it sees “substantial further progress” toward its goals of full employment and 2% inflation. In recent days several other Fed policymakers have signalled they are ready to open a more extensive discussion about what that means.
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