Dallas Fed president: Containing COVID-19 critical to economic recovery

Dallas Federal Reserve Bank President Robert S. Kaplan said containing the coronavirus is the key to an economic recovery during an online National Press Club Newsmaker event Monday, July 13.

"While fiscal and monetary policy have a key role to play…if all of us wore marks we would likely mute the transmission of this disease and that would translate into us growing faster," Kaplan said. "We would have higher GDP from here and a lower unemployment rate.”

Whether the economy has hit bottom depends on the virus, Kaplan said. The economy cratered in April, then began to grow, helped by the Paycheck Protection Program, which provided forgiveable loans to small businesses.

But growth is slowing, Kaplan said.

“The resurgence of the disease is muting that rebound,” he said. “If we all wore masks that’s probably the most important thing we can all do right now.”

The Dallas Fed forecasts a GDP contraction in 2020 of 4.5 to 5 percent, based on expected strong growth in the third and fourth quarters following a 35 percent decline in the second quarter. An unemployment rate between 9 and 10 percent would accompany the contraction, Kaplan said.

In the early stages of the crisis, the Federal Reserve implemented monetary policy that bought Treasury and other securities to provide liquidity to financial markets, Kaplan said. Other programs supported markets in corporate bonds, money markets and municipal bonds.

“Our purpose was to make sure financial markets worked and that there was access to capital,” he said.

The Congress and the Treasury implemented fiscal spending programs, such as the PPP loans, to make sure there was access to credit for small businesses.

There may be more for the Federal Reserve to do, and there is certainly more for Congress to do in terms of fiscal support, Kaplan said. These policies will be less effective if health care protocols are not followed, he warned.

Kaplan favors programs that extend, and possibly restructure, unemployment benefits, and those that would provide grants to state and local governments to replace lost revenues and forestall layoffs.

In the longer run, he supports infrastructure programs, including expanding Internet access to underserved areas.

The stock market has diverged from the rest of the economy because it is looking two or three years out to a time when when the virus has receded, Kaplan said. The divergence won’t go on indefinitely; the two will eventually converge.

The current economic downturn is exacerbating income inequality, Kaplan said. In recent years, progress has been made in narrowing the gap between between the overall unemployment rate and those for Black, Hispanic, less educated workers and women, but that progress has been reversed in the last three months.

Kaplan supports early childhood development and programs that improve literacy and skills training to narrow the gaps.

"We all need to do a better job" to end racism in employment, Kaplan said.