U.S. economy will start to rebound in second half of 2020, Fed’s Kaplan says

NEW YORK (Reuters) – The U.S. economy will experience a “significant, historic” contraction in the second quarter before it starts to rebound, and unemployment will remain elevated at the end of 2020, Dallas Federal Reserve President Robert Kaplan said on Monday.

Kaplan said he projects that gross domestic product will drop by an annualized rate of 35% to 40% in the second quarter and that it should start to recover in the second half of the year.

He said the economy may recover more quickly if consumers and businesses take precautions to limit the spread of the novel coronavirus.

“If people wear masks widely, if we have extensive testing and contact tracing, if businesses and us as individuals follow good procedure, we’re going to grow faster,” Kaplan said during a virtual discussion organized by the Money Marketeers of New York University.

The U.S. unemployment rate may have peaked and should decline over the summer, but could remain high near 8% at the end of the year, he said. Kaplan said he expects inflation to remain muted over the next couple of years even though some food prices are rising.

U.S. Federal Reserve officials need to continue discussing the possibility of using yield-curve control, in which the central bank would target interest rates at specific maturities, Kaplan said. Bond market players are increasingly convinced one of the Fed’s next moves will be to cap yields at a specific point on the curve.

“I have certain concerns about it, but I wouldn’t rule it out” said Kaplan, adding that he wants to make sure the Fed doesn’t create “more distortions” in financial markets.