- Fresh monetary and fiscal aid is needed if the economy is to survive a “historic contraction,” Robert Kaplan, president of the Federal Reserve Bank of Dallas, told Fox Business on Friday.
- Kaplan sees US GDP sliding as much as 30% in the second quarter alongside unemployment soaring to 20%.
- While the Fed’s rapidly expanding balance sheet does concern its leaders, the threat of disinflation should be addressed after the coronavirus fallout is handled, the Fed president said.
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Additional fiscal and monetary stimulus is necessary for the US to survive its worst economic downturn in nearly a century, Robert Kaplan, president of the Federal Reserve Bank of Dallas, said Friday.
The central bank has already unleashed trillions of dollars in relief through nine lending facilities, while Congress issued more than $2 trillion in aid with the CARES Act. The measures helped stabilize a plummeting financial sector, but are not enough to bridge an unprecedented recession, Kaplan said.
“This is a historic contraction, very severe,” Kaplan told Fox Business on Friday. “There’s going to be a need for stimulus in the future. That’s likely to have to come from the fiscal authorities.”
“Rates are going to stay lower for longer and the Fed is going to need to do more in terms of other actions to bridge this period,” he added.
Kaplan sees US gross domestic product sliding as much as 30% in the second quarter and unemployment surging to 20%. Full-year output will drop by 4.5% to 5%, and the unemployment rate can end the year closer to 8% if effective policy is enacted, the president projected.
Wednesday data from the Commerce Department revealed a 4.8% contraction in first quarter GDP. Economists expect the bulk of the coronavirus’ economic fallout to land in the current three-month period as shutdowns continue and businesses struggle to pay bills.
The Dallas Fed president’s comment follows a similar remark from Fed chief Jerome Powell at a Wednesday press briefing. He called on legislators to issue fresh fiscal aid after confirming that the Federal Reserve would maintain its near-zero interest rates.
Kaplan also dispelled concerns that the Fed’s rapidly swelling balance sheet will curb a recovery. The central bank’s holdings spiked to $6.7 trillion from about $4.2 trillion over just two months as it employed never-before-seen tools to avoid a complete economic meltdown. Unwinding the massive jump in managed assets may weigh on the economy, but it pales in comparison to the more pressing threat posed by the coronavirus, Kaplan said.
“I do worry about it. As we get back over the next few years to full capacity with some of this stimulus and size of the Fed balance sheet, do we start creating inflationary pressures? But that’s not going to be for two or three years,” he said.