Former Dallas Fed President: Fed shouldn't be talking about rate hikes but should keep options open

Let’s bring in former Dallas Fed President Robert Kaplan. Should they be talking about a hike this soon, Robert? Not. No, they shouldn’t be. I think though, they should be keeping their options open, and I think they will be keeping their options open. Do you think that’s what you’ll hear? But to Steve’s point, what? What it would they change the language to keep the hike on the table as an option right now instead of the easing language? I think they’d be wise to keep the language as it is my own view and I’d be arguing this in the meeting. One of the reasons why the Fed is struggling to be able to cut rates and why service sector inflation and and wages are so sticky is you’ve heard me say this before, excessive government spending which I don’t think is a long term option for the federal government. I think it’s artificial. I think it eventually is going to have to Peter out and I think the Fed would be wise just to keep their options open here and not make any grand prognostications at this point. You have been sort of leading the charge on this view that it’s it’s fiscal, it’s fiscal stimulus. So just tease that out for us. How do you see that permeating the economy, the services sector, the jobs market and leading to some of the challenges that the Fed faces? All right, so let’s separate inflation between goods and services. Goods are disinflating. In fact, the inflation rate on goods is today very, very low. The supply chain issues have gotten worked out. The the inflation issue today is almost exclusively in the not totally, but almost exclusively in the service sector. And it’s because we’ve got an aging workforce and despite some growth in in immigration and labor force, we’ve got a very sticky labor force cost issue which you saw this morning with the ECI employment cost index. So let’s just remind us why do I say fiscal is a big part of this. We ran a 15% of GDP deficit in 20, but that was the deal with Kovat. We ran another 15% in 21 that was ARPA, but that money is still being spent today we ran seven in a fraction last year we ran seven in a fraction So far the six months this year the highest deficit we ran pre COVID was in 2004 at at full employment highest deficit was 4%. So we’re running a much higher level of deficits and it’s three main programs, unspent ARPA, money Inflation Reduction Act projects, Infrastructure Act projects. They’re going on all over the United States and I see them everywhere and they’re increasing the demand for workers, not goods and services, but particularly workers. This is why the employment market is so strong is you’ve got this government generated demand for workers. I think it is somewhat artificial and I think when the government money starts to Peter out, you’ll see how artificial this is in hindsight. When does that happen? Well, the ARPA money is just now starting to Peter out. This is the last year where the money has to be obligated and spent by 25. But you still got the Inflation Reduction Act projects and Infrastructure Act projects going strong. For my money, I would love to see a whole of government approach to fighting inflation and have the federal government realize that if we’re going to make inflation fighting a priority and help 60 million low moderate income workers make ends meet, we ought to slow down implementation of the Inflation Reduction Act and Infrastructure Act projects. Not cancel, but slow. And let’s wrestle this inflation issue to the ground so working class families can better make ends meet and the Fed can begin to start taking their foot off the interest rate. But they can’t do it yet with this fiscal spigot, in my opinion.