Dallas Federal Reserve president Robert Kaplan told CNBC on Tuesday that he will likely be in favor of a rate hike before the end of 2022.
While he doesn’t see inflation becoming a problem in the near term, the central bank official said he expects the economy to evolve enough to allow the Fed to pull out of the high levels of accommodation it has provided since the Covid-19 pandemic.
Kaplan admitted he was one of the 2022 “dots” revealed after last week’s Federal Open Market Committee meeting, which pointed to a rise next year. The Fed publishes a quarterly dot chart with individual members’ expectations about the rate of interest over the next three years and beyond.
However, only three other officials from the 18-member FOMC agreed with Kaplan’s position, and the plot still indicated that there were no walks until at least 2023.
“There were some points that started to rise in 2022, and I’m one of those points, yes,” Kaplan said on “Squawk Box.”
The FOMC economic forecasts do not list the names of individual members, and it is unusual for committee members to disclose where their point was.
But Kaplan said he would like the Fed to normalize policy, even though he doesn’t think that day has arrived. Kaplan will not be given a vote on official commission policy and will not do so until 2023, although he still has input for decisions and makes an individual prediction on economic conditions and interest rate developments.
Three of the 2022 dots indicated one increase, while the fourth indicated two walks. Kaplan did not specify whether he was the one expecting two increases.
“The forecast has improved, my forecast has improved significantly,” said Kaplan, adding that he expects growth of 6.5% in gross domestic product by 2021, in line with the commission’s average estimate.
That said, we are still in the middle of the pandemic, and I want to see more than a prediction. I want to see real evidence that that prediction will unfold, Kaplan added.
“As we do, and as we make substantial further progress towards meeting our dual mandate goals, I will for one be a proponent of the process of moving some of these extraordinary monetary measures and doing so sooner rather than later,” he said . “But I need to see results, not just a strong prediction.”
Don’t worry about inflation
The Fed cut benchmark interest rates on short-term loans to nearly zero last March and buys at least $ 120 billion worth of bonds every month.
Some parts of the markets were concerned that the Fed might maintain these measures for too long, especially given the high level of fiscal stimulus. Congress recently passed a $ 1.9 trillion stimulus package and will soon begin work on an infrastructure program that could cost up to $ 3 trillion.
Those concerns are centered on rising inflation expectations, as rising bond yields show.
However, Kaplan said he is not concerned about inflation, although he expects it to rise this year, but only temporarily.
He said supply and demand issues unique to the pandemic will cause some price increases, and year-over-year comparisons will look high, but only because inflation slowed significantly during the early days of the crisis.
Inflation, Kaplan said, “isn’t just a one-off price hike. It’s price increases year after year. I think the jury is out very much about whether we’ll see that. It’s not my base case.”
Kaplan added that he would not be in favor of the Fed adjusting its asset purchases to try to cut yields on longer-term government bonds. The rise in interest rates reflects the economic recovery, he said, and he expects them to continue to rise where the 10-year bond is up about 2%.