Federal Reserve officials shouldn’t intervene to slow rising bond yields because that is expected to happen as the U.S. economy recovers, said Federal Reserve Bank of Dallas President Robert Kaplan.
“If the steepening, which I would expect, occurs because of stronger economic growth, fiscal stimulus and better economic prospects, I think that’s to be expected,” Kaplan said in an interview with Bloomberg News on Thursday. “I’d be hesitant to step in and take action that could distort that natural trend.”
U.S. 10-year Treasury yields rose above 1% Wednesday for the first time since March and stayed above that threshold on Thursday. Rising yields are anticipated as activity picks up amid more widespread coronavirus vaccinations and increased consumer spending, Kaplan said. The U.S. economy will likely grow 4.5% to 5% this year, Kaplan said, revising his previous estimate of 3.5%.
Kaplan’s comments support views on Wall Street that the Fed isn’t likely to do anything to lean against rising interest rates that are due to improved economic conditions. The Fed has kept borrowing costs at ultra-low levels since the beginning of the coronavirus pandemic to help support the economy and pledged to hold them there until employment and inflation have returned.
Stimulus measures passed by Congress in December will likely push first-quarter growth into positive territory, Kaplan said. He said the bulk of 2021 growth won’t come until the second half of the year, though, as a record number of coronavirus cases continue to weigh on the economy in the next few months.
Democrats won Georgia’s two Senate run off races earlier this week, handing control of Congress to the political party that has advocated for more fiscal stimulus, which analysts expect may further boost financial markets.
While the pandemic will likely be a drag on the economy “for a good part of 2021,” once the recovery is established and a large part of the population is vaccinated, Fed officials should start to consider “when we can start tapering,” Kaplan said.
“There will be a point at which it’ll be much healthier for the economy and for the markets to be weaning off some of these extraordinary measures,” he added.
Kaplan was one of two dissenters at the Fed’s September meeting when policy makers signaled they would keep rates near zero through 2023, something he feared might restrict future decision-making too much.
“My concern is if we get to 2023, for example, and we have unemployment rates below 4%, in the 3s, and we still haven’t quite reached our 2% inflation objective, I might well be supportive at that point of being accommodative or even highly accommodative, I don’t know that I’ll think it’s appropriate to be keeping the fed funds rate at zero, though,” Kaplan said.
He said that although inflation is likely to pick up this year as people take part in the activities that were difficult during the pandemic, technology advances that have disrupted industries and jobs will probably help to keep a lid on prices.
