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The Fed: Dallas Fed’s Kaplan says he sees first interest rate hike next year

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Dallas Federal Reserve President Robert Kaplan said Tuesday that he was one of four Fed officials who have penciled in the first benchmark interest-rate hike next year at the Fed’s policy meeting last week.

While the majority of Fed officials don’t see a rate hike until after 2023, the latest Fed “dot plot” of benchmark interest rate forecasts showed four officials expect the first hike next year and seven see lift-off by 2023.

“There were some dots starting increases in 2022 and I am one of those dots,” Kaplan said in an interview on CNBC.

Kaplan forecast inflation would rise to 2.25 -2.5% rate this year, before it settled down in 2022.

Kaplan said inflation is defined as year-after-year increases in prices and this was not his “base case” forecast.

The Dallas Fed president, who is not a voting member this year, said he sees strong 6.5% growth this year and the unemployment rate falling to 4%.

Kaplan stressed he wants to see “actual evidence” that his forecast was going to unfold before pulling back from the Fed’s easy money policy stance.

“I need to see outcomes, not just strong forecasts,” he said.

“We’re still in the midst of the pandemic right now,” he added.

The Fed is buying $120 billion per month of Treasurys and mortgage-backed securities and has said it would continue the purchases until it saw “substantial further progress” in meeting its goals of maximum employment and stable 2% inflation.

Kaplan said he wouldn’t forecast when this condition might be met.

“I am going to stay away from calendar estimates,” he said.

“I am going to be on my front foot and watching how the economy unfolds and being prepared to act as the economy meets those benchmarks,” he said.

The Dallas Fed president said he would not support additional monetary easing to suppress yields on the long-end of the Treasury yield curve unless there were “extraordinary circumstances.”

“I have been one who has been saying for most of this year that I would expect the 10-year to back up further from here – and that means 1.75 – 2%,” he said.

“I don’t see why as we recover that the 10-year rate won’t back up further. I think that will be a healthy signal, not an alarming signal. And not one I would be an advocate of getting in the way of,” he said.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.656%

came close to 1.75% in trading last week before retreating to 1.648% in trading on Tuesday.

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