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Dallas Fed President Robert Kaplan said Monday that he is skeptical of the central banking using so-called “yield-curve control” as a new tool to help the economy recover from the recession.
In a talk with the Money Marketeers of New York University, a forum for economic and finance, Kaplan said he hadn’t completely made up his mind, but didn’t seem eager for any swift decision to use the tool.
“I wouldn’t rule it out, but right now Treasury yields are relatively muted,” Kaplan said.
Advocates of so-called yield-curve control argue that it would be a useful tool to help the central bank keep interest rates low while the economy recovers. Rising rates can choke off growth in a recovering economy because they make borrowing unaffordable.
The Fed has signaled it intends to hold its benchmark, overnight, federal-funds rate at zero until 2023. Those rates presently stand at a range between 0% and 0.25%.
Some economists worry that using yield-curve control would remove important market signals, leaving the Fed and investors in the dark about the economy’s health.
Kaplan said he shared this concern.
“I worry about creating more distortions in financial markets,” Kaplan said.
“I’m not saying we shouldn’t do it, but I’d have to see evidence that there is a reason to do it,” he added.
The Dallas Fed president is seen by economists and market experts as an important bellwether of the center of the spectrum of views held by members of the policy-setting Federal Open Market Committee. He is a voting member of the that committee this year.
In other comments, Kaplan said he was worried about the high level of spending and the debt burden resulting from the response to the coronavirus pandemic. He said the central bank was running some version of Modern Monetary Theory, the controversial idea that a surge in spending and higher budget deficits won’t necessarily result in higher inflation for major developed economies.
Before the crisis, Kaplan said most economists believe that MMT wasn’t well thought out and even dangerous.
“Unfortunately because of the crisis, we have actually taken a number of steps which are heading into new territory — and so we’ve done some version of MMT to some extent to deal with this crisis,” Kaplan said
“The challenge is, I don’t think the implications of MMT were well understood before and I was concerned about them, and now that we’ve done some of these things, I continue to be concerned and we’re going to have to reckon with the implications,” he added.
That means the government should show some “restraint” and assess the implication of what has been done before we make additional moves, he explained.
In a separate speech, San Francisco Fed President Mary Daly backed more federal spending. “We…need fiscal policy makers to commit to sustained investments in our economic future,” she said in a speech to the National Press Club in Washington.
‘The need for this was evident before the crisis, and it’s even more evident now,” she said.
During his interview, Kaplan reiterated his thought that it was important that Americans wear masks to reduce the spread of the coronavirus. Efforts by the public, in addition to better and more testing, would help the economic recovery, he said. So far, these efforts have been “uneven,” he said.
U.S. equity benchmarks were off their morning lows and flirting with trading into positive territory . The S&P 500 index SPX, +0.02% was trading with slight losses while the Nasdaq Composite COMP, +0.53% was trading in positive territory after opening Monday trade sharply lower.
