Former Dallas Fed president: Federal spending kept U.S. out of a recession, but at a cost

Throughout Texas and across the nation, the results of trillions of dollars in federal spending since the pandemic began are visible in new battery plants and infrastructure.

The nation would be in a recession right now without the American Rescue Plan, the Infrastructure Investment and Jobs Act, the Inflation Reduction Act and the resulting multibillion-dollar projects that stimulated the economy, says Rob Kaplan, former president and CEO of the Federal Reserve Bank of Dallas.

“After COVID wasn’t totally over, but was pretty much over, we passed about $4 trillion of more spending, and the Fed kept printing money and keeping rates of zero,” said Kaplan in remarks last week at a Greater Dallas Planning Council event. “We were worried we were overheating the economy.”

The cost, Kaplan said, is an artificially stimulated economy that caused the Federal Reserve to continue to raise interest rates.

“You’ve got fiscal policy, to some extent, blunting monetary policy,” he said. “These spending projects are the kind you would normally do after a recession. We’re doing it before we have a recession, but it is clearly, I think, keeping us out of a recession.”

Kaplan retired in 2021 after financial disclosures showed he was trading stocks while voting on critical monetary policy for the U.S. during the pandemic. His successor, Lorie Logan, is a voting member this year of the Fed’s rate-setting committee.

The Fed may not need to raise rates further, Kaplan said, but if it does, it’s because the fiscal spending is continuing to stimulate the economy.

“I think this stimulation is somewhat artificial,” he said. “If I were at the Fed, I’d say, listen, I don’t want to respond to an artificial or temporary spending stimulus, because I think the organic growth of the economy is weakening. That’s going to be the debate this fall.”

He predicts the Fed will implement one or two more interest-rate increases, if any. He hopes as inflation continues to settle, the Fed will start cutting rates later next year.

“I don’t remember a time in our lives where you had monetary policy this restrictive and fiscal policy this aggressive on the other side,” he said. “There’s no textbook for how these two things offset. That’s why you hear chair (Jerome) Powell say we’re navigating under cloudy skies. I don’t think they know either.”

Despite the uncertain economic picture, Kaplan praised Texas for its strong migration and workforce growth compared to the rest of the U.S.

“If we can improve educational attainment, keep investing in infrastructure, we’re going to outperform the country,” he said. “There’s probably not a better hand to play in the United States than Dallas specifically and Texas generally.”