Dallas Fed President Rob Kaplan on the Economy and Monetary Policy Right Now

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

Tracy, you had a great piece, I want to say, this morning for our blog about some of the interesting dynamics happening in the economy right now.

Tracy Alloway (0:27)

Oh, thank you. I really appreciate that.

Joe Weisenthal (0:30)

Yeah, no, we're in this weird moment. We're obviously, at least on a headline basis, the economy still seems to be growing very rapidly out of the pandemic, Delta variants aside, and we'll see the effects that those have. On the other hand, we are seeing inflation in a way that we really haven't seen in years, and there's significant debate about why that is, the degree to which policy has contributed to that inflation, the degree to which policy should ameliorate that inflation.

And of course, as you sort of discussed in a very big picture framework in that piece, there's just these sort of like these bigger questions about supply side capacity and the various log jams and supply chain bottlenecks that we're seeing really all over the place right now.

Tracy Alloway (1:16)

Totally. So I think I called it the choke point economy in that piece. And the idea is that even though on an absolute level, you know, economic growth looks pretty good, there's a lot of stuff being produced in the economy on an absolute level, but on a relative basis, you can see these blockages, these shortages showing up in lots of different things and in ways that are not always productive or helpful to society or the wider economy. And so the question then is, do governments and policymakers start to step in to try to relieve some of those blockages?

Joe Weisenthal (1:56)

Yeah, and there are so many interesting policy things. And, you know, this is of course something that we've talked about a long time. There is the Fed's new framework seems to be much more willing to tolerate some periods of higher inflation in the pursuit of full employment. There was the massive amount of fiscal spending, the likes of which we've never seen before in 2020

There's a further infrastructure bill being debated. So amid all of these sort of moving pieces in the real economy, we're also in sort of, I guess you could kind of say uncharted policy territory as well.

Tracy Alloway (2:34)

Yeah, I get that it's a cliche to say that things are uncharted at this point in time, but it's true. The economic shock that we just experienced in 2020 and 2021 was very unusual and in many ways unprecedented. And now we have an unprecedented period of fiscal stimulus.

And also that's coinciding with this new framework from the Federal Reserve and new ways of central banks really thinking about monetary policy and how it works with government spending.

Joe Weisenthal (3:05)

Well, I think that is the perfect seg into our guest. I am absolutely thrilled to get to speak to our guest today. It's a real treat to have him on Odd Lots that he would come on. We're going to be speaking with Rob Kaplan. He is the president of the Dallas Federal Reserve, been in that role since late 2015 So he's seen a lot and he's in the thick of it with all of these policy choices that have to be made right now.

President Kaplan, thank you so much for joining us.

Robert Steven Kaplan (3:35)

Great to be with you, Joe and Tracy.

Joe Weisenthal (3:37)

This is really a real treat to have you on. Thank you so much. Let's just start a very big picture. I mean, it still appears that we have this rapid growth, this rapid rebound out of the crisis.

We do have this elevated inflation clearly by various readings, some debates about whether how transitory it is, when it will normalize. Just give us, let's just start with your assessment of the macro picture right now.

Robert Steven Kaplan (4:06)

So it's still our view at the Dallas Fed that GDP growth for 2021 will be in the neighborhood of 6.5%. That growth will moderate as we go into 2022, somewhere, let's say between 2.5% and 3%.

We think that we'll trend down toward 4.5% unemployment rate by the end of this year, but I'll come back to that. We think we'll end the year with a PCE inflation reading of something like 3.8%, so very elevated. And I'll talk more about that.

The big issues we're facing between now, certainly in the end of the year, are more about supply than demand. There's plenty of demand in this economy. You all were talking about it in your conversation, but everything we see suggests that consumer demand is strong and demand generally is strong. The issues we have are working out these supply demand imbalances, not just on materials, but significantly on labor. We've had a substantial number of retirements. We have people who are not in the workforce because they're caregivers. We still have fear of infection. And I think that supply demand imbalance regarding labor is going to be more persistent than people might expect.