Much of this morning's interview between CNBC's Steve Liesman and Dallas Fed's Robert Kaplan was pre-scripted and uneventful, representing the latest canned discussion of the Fed's rate hike and normalization plans. Specifically, the former Goldman partner and current Dallas Fed preident once again laid out a noted course for a fairly aggressive path of rate hikes coupled with reductions in the central bank's balance sheet for the remainder of the year.
Still, there were two notable highlights.
First, Kaplan doesn't think that's because the economy is about to take off. Instead, the regional Fed president sees growth likely continuing on the path of about 2% and not the 3% or higher GDP boom forecast in President Donald Trump's budget.
"Two things drive GDP: growth in the labor force and growth in productivity," he said. "The problem is labor force growth is very sluggish. And my own judgment and our economists at the Dallas Fed think it's going to continue to be sluggish the next 10 years because the population is aging and labor force growth therefore is slowing." Despite his structural pessimism, Kaplan said he foresees two more interest rate increases in 2017 and a start to the the unwind of the Fed's $4.5 trillion bond portfolio, a process which as BofA explained earlier could lead to some dramatic fireworks in bonds and stocks.
"I think that removal of accommodation should be done gradually and patiently." Kaplan said the balance sheet should be "substantially less" than it is today but conceded that it likely will remain above $2 trillion. "I don't want to put a specific number on it. If somebody says in the 2s, that sounds about right to me," he said.
Second, and closer to the Fed's real mandate of keeps stocks propped up, Kaplan said that while the record levels of the S&P500 aren't yet flashing "worrisome signals" of an imbalance that risks derailing the U.S. economy, he did make an odd comment, saying that "some correction" in the stock market may be healthy for sustaining the economic expansion for longer.
"What I'm looking for is increased imbalances in the economy, increased leverage and other imbalances because rates are so low. If there were some correction in the stock market that could even be healthy, but also looking at the stock market, other people comment on whether the P/E is too high or too low, what I am looking at is fundamentals particularly earnings growth which has basically been positive. So I don't see a bubble out there. I don't see excesses or imbalances. I am concerned that imbalances may build, but if you ask me today right now it's manageable, but I do think if there were some correction also in the markets, that could actually be a healthy thing."
Needless to say, this is an odd statement for the Fed - which explicitly controls all asset prices through interest rates and its balance sheet - to make, and if taken at face value suggests that Goldman's recent rhetorical question, namely "whether Yellen has lost control of the market", may be more accurate than it seems.