Fed’s Kaplan is worried about inflation and risk-taking, and wants to announce taper in September

Dallas Federal Reserve President Robert Kaplan would like to see the central bank announce next month that it will begin tightening its policy reins.

Among his reasons is a general belief that the economy can withstand a little less help from the Fed. But Kaplan also said he’s concerned about inflation and “excess risk taking” that has led to “distortions” in financial markets, particularly in bonds.

“Based on everything I’ve seen, I don’t see anything at this point that would cause me to materially change my outlook,” Kaplan told CNBC’s Steve Liesman. “It would continue to be my view that when we get to the September meeting, we would be well served to announce a plan for adjusting purchases and begin to execute that plan in October or shortly thereafter.”

Kaplan spoke of the Fed’s critical “taper” question – when it will be appropriate to start pulling back on the $120 billion a month of bond purchases it has been engaged in since the early days of the Covid-19 pandemic. His remarks come a day ahead of a closely watched speech from Fed Chairman Jerome Powell who will speak as part of the virtual Jackson Hole symposium.

Earlier in the day, CNBC aired an interview with Kansas City Fed President Esther George, who expressed similar sentiments that she sees the taper starting soon. St. Louis Fed President James Bullard was even more hawkish in remarks to CNBC.

Both said that while rising Covid cases, and its delta variant, are a concern, they don’t seem to be having much impact on the economy in a broad sense.

“What we’re seeing is businesses and consumers are learning to adapt and go on with their lives, and they’re realizing that this is not going to be neat and clean or a straight line,” Kaplan said. “It’s going to go in fits and starts, and they’re getting adjusted to that reality.”

However, he is concerned with the impact that ultra-loose Fed policy is having on the economy.

Inflation has been running around multidecade highs in 2021, and Kaplan said rising gas and housing prices are affecting the lower-income communities in his district.

“What we’re seeing in these communities is inflation affects them disproportionately,” he said. “I think at the Fed we have to take that very seriously.”

Kaplan cited the knock-on effects that high housing prices are having on rents.

He also said he is seeing high levels of risk-taking, particularly in the high-yield end of the fixed income markets.

For both those reasons, he thinks it’s time for the Fed to dial back its accommodation.

“I think we’ll be a lot healthier if we could soon wean off the purchases, and it will put us in a lot better position going forward,” he said.