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Fed’s Kaplan Says Virus Surge Threatens Next Two Quarters

Steve Matthews and Catarina Saraiva
·3 min read

(Bloomberg) -- The U.S. economy is likely to have a strong recovery from the pandemic-induced slump in the second half of the 2021 though the resurgence of Covid-19 jeopardizes the next two quarters, Federal Reserve Bank of Dallas President Robert Kaplan said.

“We have a couple of very difficult quarters in front of us,” Kaplan said Tuesday in a virtual interview with Michael McKee at Bloomberg’s Future of Finance 2020 event. Citing business contacts, Kaplan said, “Over the horizon, the future looks bright and we’ll have a strong year next year but we have got to get through the next couple of quarters.”

Kaplan, echoing comments from Fed Chair Jerome Powell, said additional fiscal policy support would be helpful, especially for unemployed workers and small businesses that need support to survive the next few months. The Federal Open Market Committee last week kept interest rates near zero and discussed potential changes in its asset purchase program, Powell told reporters after the meeting.

“If we don’t renew it, we will see a drop-off at some point in household income and consumer spending,” Kaplan said, referring to fiscal aid for the unemployed and small businesses. “It will hurt the entire economy because it will weaken consumer spending.”

An increased number of virus cases is already reducing mobility of some Americans in cities, with a resurgence such as El Paso, Texas, Kaplan said.

“If the resurgence gets bad enough where it overwhelms health care systems in various cities, they may not have a choice but to institute lockdowns,” he said. “That is a real downside risk and a danger.”

Investment Needed

Kaplan said that while he anticipates outsize growth of about 3.5% next year, the years following that will see a return to slower growth of 1.5% to 1.75%, which is a structural problem that the U.S. can address by investing in education, expanding childcare and rethinking immigration.

“We’ve got to find ways to grow the workforce and there are a bunch of ways to do that,” Kaplan said in a separate virtual event Tuesday. “How to improve education and skills training, and make a more productive workforce -- and some investments in WiFi and infrastructure will also help with that –- that’s going to be our challenge.”

Although he believes that having a robust safety net is important to helping unemployed Americans, Kaplan said doesn’t think that a universal basic income, which some economists have proposed as a way to provide a livelihood for workers whose skills have become obsolete, among other things, is the right tool.

Before the pandemic “we didn’t have a problem with jobs, we had a structural problem that maybe we need to beef up training and improve our education system to make sure workers were ready to do those jobs,” Kaplan said in a virtual panel with the Council on Foreign Relations. “I think that’s the answer -- improving the education ecosystem -- I don’t think the answer is universal income unless it’s for safety net purposes when you lose your job.”

(Updates to add comment in seventh, ninth paragraphs)

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