Dallas Fed president: Interest rates to reach pre-pandemic levels as economy recovers

Robert Kaplan says interest rates reaching pre-pandemic levels is 'a healthy sign'

Dallas Federal Reserve President Robert Kaplan told "Mornings with Maria" on Thursday that he expects interest rates to reach pre-pandemic levels as the economy recovers, which he said is "a healthy sign" and "not an alarming sign."

Kaplan, who is a voting member of the 10-person rate-setting Federal Open Market Committee, made the comment one day after the release of minutes from the central bank's March meeting, which revealed that the central bank plans to continue the pace of its asset purchase program in an effort to meet its dual mandate of maximum employment and price stability. 

With their own forecasts projecting the strongest run of economic growth in nearly four decades, "participants noted that it would likely be some time" before the situation in the U.S. improved enough for the Fed to consider pulling support, Reuters reported the minutes revealed. 

The Fed made no changes to its near-zero target interest rate or the $120 billion pace of monthly bond-buying at the March 16 to 17 meeting. Fed officials also boosted their outlook for the economy significantly as they surveyed advancements as it pertains to coronavirus vaccines and the trillions of dollars in fiscal support.  

The median Fed policymaker projection for economic growth this year increased from 4.2% as of December to 6.5%, which, if achieved, would reportedly be the fastest rate of expansion since 1984. 

On Thursday, Kaplan referenced the Dallas Fed’s updated outlook.

"The economy is strengthening," Kaplan told host Maria Bartiromo. "Our outlook now with the Dallas Fed is for GDP growth this year to be in the range of 6.5% and I know there’s some private forecasters who have more aggressive forecasts than that." 

He then pointed to pre-pandemic interest rates, noting that in February 2020, before the onset of the coronavirus pandemic, "the 10-year Treasury [note] was in the range of 1.75 to 2%." 

"So I’ve been assuming and expecting that as the economy recovers, it wouldn’t surprise me to see rates back up to that level and I think that’s a healthy sign, not an alarming sign," Kaplan continued. 

The recent rise in the 10-year yield has rattled investors as it reached higher than the S&P 500's 1.5% dividend yield.

As of Thursday morning, the benchmark yield was trading slightly lower than the day before at around 1.64% after hitting a 14-month high of 1.75% late last month as President Biden released the details of his $2.25 trillion infrastructure package on the final day of the first quarter.

The Biden administration says its so-called American Jobs Plan will be a "once-in-a-century capital investment" in U.S. infrastructure that will create millions of good-paying jobs that positions America to "out-compete" China.

The $2 trillion plan will be entirely funded by Biden’s proposed Made in America tax plan that would hike the corporate tax rate to 28%, up from 21%, and increase the minimum tax on multinational corporations to 21%. The increase in the corporate tax rate would partially undo former President Trump’s tax cut which lowered the top corporate rate from 35%, among the highest in the world.

On Wednesday, President Biden said he is willing to lower the proposed corporate tax increase amid pushback from Republicans and some moderate Democrats.

"I'm willing to listen to that," Biden said when asked at the White House whether he would consider a corporate tax rate lower than 28%. "I'm wide open. But we've got to pay for this. There are many other ways we could it. But I'm willing to negotiate that."


On Thursday, Bartiromo pointed to the corporate tax increase included in Biden’s massive spending proposal and asked Kaplan what he expects would impact the U.S. "growth story that is certainly getting better, but could see headwinds as taxes go higher."

Bartiromo also pointed to a study from The National Association of Manufacturers released on Thursday, which noted that a higher corporate tax rate would lead to a loss of one million jobs within two years.

"Most businesses that I speak with have already internalized and are expecting some increase in their taxes," Kaplan responded, the thing that "they’re trying to manage around it." 

He then deferred to outside forecasters saying, "You’re already seeing price adjustments being forecast or earnings adjustments for the S&P 500 earnings and most of the forecasts based on what’s being discussed I would view those adjustments as modest, not substantial and I think most businesses are thinking about ways to manage this." 


"Do I think right now these discussions would be enough to slow down growth or the improvement we see?" Kaplan went on to ask. "It wouldn’t cause me right now to make a material adjustment to my forecast."


FOX Business’ Jonathan Garber and Megan Henney contributed to this report.