The Federal Reserve should start to slow down, or taper, its asset purchases before the end of the year, Dallas Fed President Rob Kaplan said Wednesday.
Since late April, Kaplan has been a forceful advocate for the Fed to slow down the bond purchases but he has never before been so specific about when the Fed might begin the process.
In an interview with Bloomberg Television, Kaplan was asked if he agreed with the general market consensus that tapering would start at the end of the year.
“I would prefer sooner,” Kaplan replied.
The Dallas Fed President went on the say he’s been “deliberately vague” in his public comments about timing but said he was more specific about timing in the Fed’s interest-rate committee meeting in mid-June.
Minutes of that meeting will be released on July 7.
The Fed is buying $120 billion per month of Treasurys and asset-backed mortgage securities to foster smooth financial conditions and boost the economy.
Kaplan said the purchases don’t make as much sense now as they did last year.
“These purchases are very adept at stimulating demand, but we’ve got plenty of demand. Our problem is supply and these purchases are not very effective when you’ve got a supply issue,” Kaplan said.
Kaplan said he thinks inflation will run at a 3.5% annual rate this year but then slow down to around 2.4% next year, still above the Fed’s 2% target. Kaplan said he thinks price gains will be broad-based in 2022.
Tapering would put the Fed in a better position to avoid more abrupt action in the future if the Fed has to respond to excesses in the housing and other financial markets.
Former top Fed staffer Claudia Sahm said that fears on inflation are overblown. In an interview with MarketWatch on Barron’s Live, Sahm said she already saw signs that inflation was cooling and that the inflation rate would settle below the Fed’s 2% target once the pandemic impact washes through the economy.
The yield on the 10-year Treasury note
has continued to trend below the 1.75% level hit in late March.