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  • Let's start with a big move this week because two weeks ahead of a scheduled meeting, just a couple of hours after a G seven announcement from the finance ministers and central bankers were going to do what's appropriate.

  • Fed comes barreling out of the gate.

  • Emergency meeting.

  • 50 basis point cut hasn't happened since 2008.

  • Why the urgency?

  • What shifted?

  • I think that, you know, J.

  • Paul did a great job in his press conference in hallucinating the details around this, but, you know, risks obviously arising that this Corona virus could be more severe than, uh, what were previously thinking.

  • I think the sentiment for me, anyway, was that we were probably gonna have to move at the March meeting anyway.

  • Might as well move that up and do it sooner.

  • S o.

  • I think that was the basic thinking here.

  • I also think that we got the policy rate to the right place for now, Uh, given the information that we have now, and we took out some insurance against the possibility that this will cause growth slowdown in the US well, you know, that's interesting.

  • You say it's at the right level for now.

  • because Donald Trump President Trump is the only person who's calling for more rate cuts.

  • A lot of traders.

  • Wall Street economists are saying the Fed will move again.

  • 50 basis points at the March meeting is that doesn't sound like something you're on board with you.

  • I don't think I don't think you should prejudge that meeting at this point.

  • We've already just had a meeting.

  • We moved the policy right where we thought it should be.

  • Given the information we have today, Obviously, it's a very fluid situation, and we are keeping track of things.

  • But, you know, you've hung around monetary policy for a long time.

  • It's unlikely we're gonna have that much different of information when we get to the get to the March meeting.

  • Depending on how you view how rapidly this is, this is gonna move shortly.

  • Can keep our options open there.

  • But, um, since what we kind of pulled that that decision forward.

  • I'm not sure you should put a lot of weight on the march meeting right now.

  • Anyway, we could meet intermeeting anyway, which we've just shown that we could do so so I just wouldn't want to put a tremendous amount of focus on this on this March meeting.

  • There won't be a lot of new information there that we don't have today, except except how the virus is progressing day today.

  • That kind of information will be, uh we'll have a little bit more on that.

  • So that is something that the Federal Reserve is now tracking very closely.

  • I mean, that's what we started doing with China and everybody.

  • Yeah, globally.

  • Yeah, well, on the FOMC, uh, was there was this pretty much unanimously supported Was this in any sense of close call as this participants got on the phone and talked about it and voice their opinions and set their boats.

  • You're not a voter, but nevertheless, everybody has a say in this.

  • Yeah, I can't talk about the meeting itself, but the vote was unanimous.

  • And, uh, I think I think it's pretty clear that the baseline of the U.

  • S.

  • Economy is still quite good.

  • Best labor markets we've had in 50 years and all the rest of this associate with that great consumption, everything's looking good.

  • But the downside risks have increased here.

  • And so we want to take that on board and get some insurance to make sure we keep the expansion going.

  • As we deal with this temporary virus, they will be temporary.

  • We'll eventually we'll get through this.

  • But the question is, how severe is there gonna be?

  • How long is it gonna last?

  • Because of the fact that, um, the meeting was so close.

  • And you only have so much information.

  • I think a lot of people have concluded that this rate cut was really focused on confidence.

  • I guess that was a conference.

  • Wasn't the stock market wanting to create help, stand up and say we're here to create some stability and not see the market continue to take Anna's courses?

  • You know, the first reaction to the move was a big sell off in stocks.

  • You know, the reaction.

  • That was the reaction, but ahead in the meeting, there was actually a rally based on the fact that the G seven ministers we're gonna we're gonna meet.

  • And I think, uh, this was kind of buying the rumor sell on the news kind of situation, so I'm not quite sure you could just read it straightaway.

  • A ce faras When?

  • When the fed moved here.

  • You know, a lot of people would say, Well, probably doesn't matter that much if you do, if you make the rate cut 10 days ahead or 10 days later and I think that's true from a macroeconomic perspective, But at least my thinking waas, why don't we just go ahead now?

  • If we if we think we're going to do it in March, we must just go ahead now and UM, and position monetary policy appropriately for the current situation.

  • Did the stock market in there to it all and the big?

  • So because we've seen some pretty we've had quite a downdraft from the highs I know the stock market is still maintaining some gains from the beginning of the rally.

  • Nevertheless, investors like you and I have talked about this over the years, but the the stock market is trying to look ahead and see what the growth prospects are for the US economy.

  • The Fed is trying to do the same thing.

  • Look ahead, see what?

  • See what the prospects are for the economy.

  • The stock market trades minute by minute.

  • We only meet every so often, so sometimes it looks like one is reacting to the other But I don't really think that that's true.

  • I think both are trying to forecast the future, and I think that's what was that was going, what was going on here.

  • Can you walk us through Jim?

  • How a rate cut is supposed to help deal with a virus This is not like looking at employment reports and retail sales.

  • So is there a mechanism?

  • Would it be through higher stock prices because of Fed move Does create confidence.

  • Ah, lower US dollar, lower rates for home and auto loans.

  • Are they gonna work?

  • If people are so freaked out about the virus, they can't think about anything else and don't go out and shop and don't make the big decisions like that.

  • What's the mechanism for interest rates and the virus?

  • Yeah, I mean, we we know and chair Paul said during the press conference.

  • You know that this isn't going to fix, you know, medical issues.

  • I do think we will get an outstanding public health response in the U.

  • S.

  • And my thinking on that is that that response is occurring at the federal level, the state level, the local level and even on the individual level And so you've got many reactions to this Corona virus that on net, I think, will be very positive in helping Toa protect us against the spires as best as we can be protected.

  • So I think we'll do very well.

  • I think we have a very good health system in the U.

  • S.

  • One of the best in the world.

  • And, uh, we'll be ableto handle this a cz well, as it can be handled.

  • So I think what will happen going forward is we'll get news about, you know, there's an outbreak here or there.

  • I think we'll get many more cases in the days ahead.

  • But I think, generally speaking, I'm optimistic that we can make a good response here on the health side for that for interest rates.

  • I think we just had to take on the idea that there is risk to growth to the downside, and, uh, that would naturally lower the rate of the natural rate of interest on.

  • Do we have to take that on board when we were making monetary policy?

  • So, um, have you cut your growth forecasts at this point?

  • Some.

  • A lot of private forecasters have, you know, uh, we're in the We're in the middle of working on that.

  • So what do you think I should do?

  • Uh, I think my bass case is still that will will do quite well in the U.

  • S.

  • Economy for this year.

  • I think the fundamentals are good, and I think the base cases that we can bring this virus under control.

  • Um, I understand that there's downside risk to that, and that's why I'm willing to adjust policy.

  • And I think all options are on the table as far as that goes.

  • But, uh, but for this year, you know, uh oh, a CD came out with growth forecasts.

  • I think they only marked the US down 1/10.

  • Uh, that was a group that was trying to get the whole global impact and model the whole thing and put it all together, and they came up with only 1/10 on US growth as a base case.

  • They also understand that there's downside risk, but but I think that's probably the best way to think about it right now.

  • First quarter tracking growth HS market still a 2.1% so I'm not quite sure we're going to see as big an effect in the first quarter's maybe what people were previously thinking.

  • So I think a lot depends on how the virus evolves here in.

  • And, um so we're gonna have to play this very carefully going forward.

  • But for right now, sitting here right today, I'm I'm still sticking to a pretty good base forecast for the US economy.

  • What about this criticism or fear?

  • Concern that the Federal Reserve is using valuable interest rate cut ammo at a time when it may not be very effective.

  • If the virus gets worse and people to go out and shop, interest rate cuts can't change that.

  • And in fact, if we look at China, what did they do to slow the virus?

  • They took steps that slow the economy.

  • They closed factories.

  • They told people to stay home.

  • If it gets bad in the U.

  • S.

  • Won't that happen to why be cutting rates at a time when the cure for the virus is, in effect, slow the economy, make people stayed at home?

  • You make me make sure that these these activities that connect us are not occurring on.

  • And then you're just doing your witness.

  • I know, I know a lot of people are saying this, but they're forgetting that there are longer run strategic decisions that might be made based on lower rates.

  • You might stimulate some investment that wouldn't otherwise be made on the margin.

  • Households might decide Thio make a purchase that they wouldn't otherwise make from their home computers or something like that.

  • So I really am not sure that you can just make this cleaned economy and say there aren't any effects.

  • People often say that about monetary policy.

  • It rarely turns out to be true.

  • So what about the bond market, Jim?

  • I mean, did you ever think you'd see a 10 year note, but low 1%?

  • Stocks have rebounded a bit today, but the tenure is still, you know, 10.9 and some and change.

  • What's the signal here?

  • What is that telling us?

  • Well, I think markets have become worried about this morphing into a global pandemic, and there's a lot of flight to safety coming to the U.

  • S.

  • So that's, I think, lion share of what's going on here, Um, and sitting here today, we're not quite sure how this is gonna transpire in the U.

  • S.

  • And Europe in particular.

  • And so we're gonna have to wait and see how the how the virus progresses going forward.

  • I think you know, uh, it's amateur hour for Mia's a ce faras the medical part.

  • But I do think a lot of the cases turn out to be more mild.

  • That has happened in China.

  • That might happen.

  • Appears to be happening in the U.

  • S.

  • A Spartan what I can tell.

  • But, um well, just watch this very closely and and encourage our public health officials to make a great response here.

  • Are you worried about negative bond yields in the United States to welcome them?

  • And in fact, that leads me apart to that question.

  • Maybe is the important part if bond yields are so low.

  • And if we're gonna get negative.

  • Banyuls people are saying protecting at the short.

  • And why does it need to cut rates?

  • Yeah, So the market did our work for us already because most of the yield curve is very low.

  • Anyway, So, um, I think we're, uh, like I said, I think we're moving the policy rate to an appropriate level, given the downside risk that's out there.

  • Even though the baseline forecast ISS is still pretty good, growth in the U.

  • S.

  • Inflation sounds doesn't seem like anybody's front partner.

  • Worry right now, does it, especially with virus and this whole question of where we're going next on rates.

  • But does it have an implication for inflation?

  • Because we know this has been a big deal for the Fed and particularly for Chair Powell.

  • Let's get freshen up to target.

  • He really want to do it in 2020.

  • Is this going to make it a lot tougher, if not impossible?

  • For some reason?

  • Yeah, well, for those that want to interpret this as a pure supply shock, they've got some explaining to do.

  • Unless they they're also willing to say that inflation is gonna go up because that's what a supply Shocked has conventionally defined would be doing.

  • It would be sending inflation higher.

  • That would actually be a welcome development from the point of view of the committee, because we have been trying to get inflation up toward target.

  • So I think if if we got that kind of, um, development, I'm not really expecting that, But let's suppose we got some bottlenecks and some pricing that drove was enough to drive inflation somewhat higher.

  • I think we'd welcome that and accept that as part of the part of the shock.

  • At a time when the Fed wants provide more stimulus and maybe you don't want to rely so heavily on rate cuts, you know, there's there's been forecast from Fed officials that, um, the liquidity provided through repo operations is going to be gradually tapering in the first half of the year.

  • Would this be a time to go in the opposite direction And to be more generous and make sure there's lots of liquidity, take some of the pressure off rate cuts and, uh, and and use a mechanism that is there waiting to be used?

  • Yeah, that's more of a technical decision on operational aspects of, AH, monetary policy that's run by the New York desk.

  • But we're trying for that.

  • We're trying to get through this April time frame where we could have tax, uh, tax returns coming in and so on.

  • And that's often a time when there's volatility in short term funding markets.

  • So we're gonna make sure we have.

  • I think, that nailed down and taking care of.

  • And then once we get past that, we can review that that policy.

  • But I think it is interesting to think that, you know, we could we could look at that and do something there if we wanted to.

  • Like I say, I think everything's on the table here.

  • I don't think there's any reluctance to, um, you know, use various tools to our advantage you've worn in the past about a sort of Japan style deflationary downward spiral.

  • Um, do you see any?

  • Is that again?

  • Sort of the asking.

  • That question is the result of the fear of the virus and how bad this could get.

  • Or is this something that you could see combining with other factors in the world that are already in play, actually a sliding in that direction?

  • Uh, I think there is some risk of that, but I think one of the things we're trying to do here stay out of that situation.

  • Move aggressively now.

  • Uh, keep the expansion going.

  • Keep growth on an even keel.

  • Keep labor markets performing well and get inflation up to target or above target.

  • Let it go above target for a while.

  • Those are the kinds of things that we're trying to do here to make sure that we've got the ability run, monetary stabilization policy well into the future.

  • Here.

  • When you look at China's latest numbers, of course we have the dreadful PM I.

  • But we know that was partly engineered by the Chinese government.

  • Ah, but car sales were down.

  • Something like 80%.

  • They were already weakened.

  • China.

  • How does their economy look to you now?

  • Are they at a point where you think the worst is over, or do you think China could sink further?

  • Second, largest economy has a lot of implications for other Asian nations for models.

  • You so many things, those numbers.

  • I think we're no surprise.

  • You had major fraction of the Chinese economy essentially shut down eso.

  • You would expect those kinds of numbers to be very bad in that particular juncture.

  • But thinking is that they get past the virus and it does look like there bring it under control and then, ah, factory start toe ramp up again.

  • Some of the production is made up, maybe a lot of it.

  • And so you get a bounce back later.

  • You know, before we got going on this previously?

  • That was Wall Street story Then Then I think Wall Street got a lot more pessimistic and maybe policymakers to and we got news from around the world about the spread of the virus, but it's worth remembering that that was the original story.

  • And that is what has happened with other viruses in the past.

  • They do Peter out factory, start up again.

  • Production starts up again.

  • You make up for a lot of the past production.

  • So, um, you know, we'll see how this develops.

  • We're gonna keep a close eye on it.

  • But that's ah, narrative worth remembering, I would say.

  • And a CZ you emphasize, as everyone does the fact that we we know this in some sense will be maybe a long temporary.