Dallas Fed President Rob Kaplan said Thursday that the best way to “wean” markets off the central bank’s bond buying is to start the exit soon and move gradually.
“I am of the view that actually weaning off these purchases soon, but doing it gradually, will actually put us in a better position down the road,” Kaplan said in a telephone interview with MarketWatch.
The Fed is buying $80 billion of Treasurys and $40 billion of mortgage-backed securities every month to hold down long-term interest rates and support demand.
In an interview with CNBC earlier Thursday, Kaplan said he wanted the Fed to announce its intention to taper at its next meeting in late September and then to start to slow down the pace of purchases in October or November.
Kaplan told MarketWatch that one path might be to reduce the pace of Treasury purchases by $10 billion and MBS purchases by $5 billion each month.
That would end the purchases in June.
Moving faster might work but would be “a little riskier,” he said. But Kaplan said he was open-minded about the details of the tapering.
The Dallas Fed president said it was tough to say how much the yield on the 10-year Treasury note
might rise as a result of the tapering. He said he was assuming yields would move higher but was also “struck by how strong the bid is” for longer-term U.S. government notes.
Kaplan said he wouldn’t be surprised by a widening of credit spreads and yields on weaker credits as a result of the Fed’s pullback from an ultra-easy policy path.
Kaplan had gotten some attention last week when he said he might shift to a later announcement and start of the tapering as a result of the potential headwinds to the economy from the spread of the coronavirus delta variant.
But after a review of the high frequency data since then, he thinks it is OK for the Fed to being the process of pulling back.
Kaplan said high frequency data on consumer mobility in the economy “was going sideways” instead of deteriorating as might be expected.
In addition, no business executives said the slowdown from the delta variant was worse than the shutdown of the economy in 2020.
Some executives said the resurgence is similar to the effect of the coronavirus and “a good remaining chunk” said the negative impact is much more muted.
“The theme from everything we’re seeing is… fundamentally, we’re not seeing anything at this point that causes us to change our economic outlook,” Kaplan said.
Fed Chairman Jerome Powell is expected to discuss the outlook for the economy at 10 a.m. Eastern Friday. He has said the impact of the delta variant was unclear.
“With every wave that comes, business and consumers get better and better at adapting and the impact is a little bit less,” Kaplan said.
Stocks fell on Thursday with the Dow Jones Industrial Average
closing 192 points lower, down 0.5%. The S&P 500
and Nasdaq Composite
retreated moderately after each posted a record finish on Wednesday.