Benzinga - by Piero Cingari, Benzinga Staff Writer.
Former Dallas Fed President Robert Kaplan offered a stern critique of current U.S. fiscal policies, suggesting that they are hampering the Federal Reserve’s ability to lower interest rates amidst ongoing economic pressures.
In exclusive interview with Market News (MNI), Kaplan highlighted that the expansive fiscal measures, which include unspent funds from various acts like the ARPA, CHIPS, and the Infrastructure Act, have contributed to sustained inflation, particularly in the services sector, leaving the Fed in a position where rate cuts are not advisable in the near term.
Impact Of Loose Fiscal Spending Kaplan stressed the contradiction between the Federal Reserve’s efforts to temper demand through tighter monetary policy and the government’s fiscal actions, which continue to stimulate demand.
He expressed concerns over the potential economic consequences of these policies, including rising debt-to-GDP ratios and interest payments that could soon surpass national defense spending.
Kaplan suggested that the central bank might need to avoid lowering rates throughout this year, citing services inflation propped up by loose fiscal measures as a key concern.
“I would be kicking the can down the road and I would not be ready to cut rates until I saw more sustained improvement but I would also be keeping my options open,” Kaplan stated during the interview.
“I would be prepared to consider that we might do a couple and I’d be prepared to do zero,” he said, reflecting on the possibilities of future rate adjustments.
According to Kaplan, the neutral short-term rate is likely elevated due to the robust and continuous economic boost from government spending.
“Monetary policy is highly restrictive, however, fiscal policy is historically stimulative,” he noted, pointing out the discord between the Fed’s intentions and fiscal activities.
Kaplan expressed concerns over the economic sacrifices made to possibly achieve a soft landing. He underscored the rising national debt, anticipating that interest payments might soon eclipse defense expenditure.
“We’re buying this soft landing,” Kaplan remarked.
“These are the kinds of projects you would normally do after you had a recession, and we’re doing it pre-recession, and the cost of it is higher interest rates.”
Kaplan attributed the persistence of high services prices to the government’s spending spree, suggesting that “it’s going to remain sticky, as long as you’ve got the fiscal spigot pretty wide.”
The Cost Of A ‘Soft Landing’ The tension between fiscal and monetary policy is a critical point of contention for Kaplan, who fears that without a recalibration of fiscal spending, the U.S. could face prolonged high interest rates and a potentially destabilizing economic scenario.
The International Monetary Fund has also flagged concerns, predicting a fiscal deficit of 7.1% by 2025 and signaling significant risks to the global economy due to the U.S.’s expansive fiscal deficit.
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Kaplan advocated for a more comprehensive government strategy to combat inflation, which would involve scrutinizing all aspects of economic policies rather than just monetary adjustments.
“It would be unfortunate if the answer is everything stays the same and so the Fed is left to either delay much longer or take action” and raise rates, he commented.
He also suggested that the Fed should better communicate how fiscal spending impacts economic dynamics, emphasizing that the elevated neutral rate is largely fueled by aggressive fiscal activities.
Kaplan believes the real solution may involve either maintaining higher rates longer or moderating fiscal spending to balance economic growth.
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