Fed's Kaplan says economy could shrink as virus surges

FILE PHOTO: Dallas Federal Reserve Bank President Robert Kaplan looks on during an interview in his office at the bank's headquarters in Dallas, Texas, U.S. January 9, 2020. REUTERS/ Ann Saphir

(Reuters) - Dallas Federal Reserve Bank President Robert Kaplan on Thursday said the economy could shrink this quarter as consumers in more states and cities pull back from economic activity amid the record coronavirus case surge.

“It is possible we could have negative growth if this resurgence gets bad enough and mobility falls off enough,” he said, pointing to a drop in activity already visible in places like El Paso, Chicago, Utah, Wisconsin, and Colorado. “The next couple of quarters is going to be very challenging.”

Kaplan had previously said he expected the economy to grow at a 4% to 5% annualized pace. “With this resurgence, the risks are all to the downside,” he said.

As the vaccine is rolled out, economic activity should rebound, especially in the second half of next year, he predicted.

The Fed is buying $120 billion of bonds each month and should continue doing so, Kaplan said.

“If we needed to, if this got bad enough, we could extend maturities, but I woulnd’t increase the size,” he said.

In addition, he said, it’s “critical” the Fed keeps its emergency lending programs going into next year. They are currently scheduled to expire on Dec. 31.

Reporting by Ann Saphir