WEBVTT - Surveillance: The Fed's Toolbox With Kroszner 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jay Ley. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.440 Bloomberg dot Com, and of course on the Bloomberg. Please 0:00:27.480 --> 0:00:29.840 to say that Johning us now Eric Robinson. It's not 0:00:29.960 --> 0:00:32.680 a chout at Bank Global Head of Research. Eric, fantastic 0:00:32.720 --> 0:00:35.000 to catch up with you, sir. Let's pick up well 0:00:35.040 --> 0:00:38.120 Lisa left off, shall we? If they can't surprise, how 0:00:38.120 --> 0:00:42.559 do they guide? Look? I think what the FED is 0:00:42.560 --> 0:00:47.720 going to tell us is that they remain ready, willing, 0:00:47.960 --> 0:00:51.720 able to do whatever they feel is necessary to continue 0:00:51.760 --> 0:00:55.800 to support the economy. Um They have shown over the 0:00:55.880 --> 0:00:59.120 last few weeks that they have probably moved away from 0:00:59.160 --> 0:01:02.400 trying to offer aid in a traditional meeting by meeting framework, 0:01:02.440 --> 0:01:06.080 and as their assessment of the economy, credit conditions and 0:01:06.080 --> 0:01:09.200 liquidity changes day to day, they reacts as they need to. 0:01:09.319 --> 0:01:12.280 So I agree with the assessment that we shouldn't be 0:01:12.319 --> 0:01:15.880 expecting any major surprises. I think we'll get some guidance 0:01:15.920 --> 0:01:19.479 on on asset purchases, but you know, look, the Fed's 0:01:19.480 --> 0:01:22.039 balance sheets gone from just over four billions six and 0:01:22.040 --> 0:01:25.320 a half billions in very short orders. So, um, I 0:01:25.360 --> 0:01:26.960 don't think they're going to be telling us that they're 0:01:26.959 --> 0:01:28.880 going to be stopping, but I think we may get 0:01:28.920 --> 0:01:32.560 some guidance on on what the magnitude of asset purchases 0:01:32.600 --> 0:01:35.080 looks like going forward. Let's talk about that, Eric, have 0:01:35.120 --> 0:01:40.240 you settled on a number, a monthly number for purchases. No, 0:01:40.440 --> 0:01:43.120 I haven't. I mean, look, you know, when the FED 0:01:43.240 --> 0:01:47.720 started this a few weeks ago, they were talking about 0:01:47.800 --> 0:01:51.720 daily numbers of asset purchases that you know, thirteen years ago, 0:01:51.800 --> 0:01:54.640 during the financial crisis, we would have assumed would have 0:01:54.640 --> 0:01:57.720 been a monthly number. Right. So the order of magnitude 0:01:57.760 --> 0:02:01.080 of what the FED is prepared to do uh today 0:02:01.600 --> 0:02:06.080 versus years past, it's just dramatically different. Um. I think 0:02:06.120 --> 0:02:08.640 the Fed's balance sheet is going to go, you know, 0:02:08.880 --> 0:02:12.000 quite a bit wider and larger. They're already at about 0:02:12.800 --> 0:02:14.400 to g d P as I said, six and a 0:02:14.440 --> 0:02:17.960 half trillium. I can easily imagine them getting to seven 0:02:18.040 --> 0:02:20.480 or eight trillion by the end of the year. Eric, 0:02:20.560 --> 0:02:23.040 Let's talk about guidance a little bit further and dig 0:02:23.080 --> 0:02:25.400 in there as far as what the central bank is 0:02:25.400 --> 0:02:29.120 actually looking for. Is it inflation? Is it unemployment rates? 0:02:29.160 --> 0:02:32.720 Are they focused at all on the increasing wealth gap 0:02:32.800 --> 0:02:36.160 that we saw increasingly in focus post two thousand and eight. 0:02:36.600 --> 0:02:39.680 Where how important is it to determine which of these 0:02:39.720 --> 0:02:44.480 factors that feeds really focused on. So I think, look, 0:02:44.560 --> 0:02:48.280 I think you can prioritize those um and I think 0:02:48.280 --> 0:02:50.799 this is how the FED is likely to be thinking 0:02:50.800 --> 0:02:54.280 about it. The first question point you made was inflation. 0:02:54.400 --> 0:02:58.240 Now we all know there's been a massive amount of demands, 0:02:58.360 --> 0:03:02.040 destruction and and a and a and a significant contraction 0:03:02.080 --> 0:03:04.720 in the economy in that environment, that that's not going 0:03:04.800 --> 0:03:07.200 to worry about inflation in the short term. If anything, 0:03:07.200 --> 0:03:11.120 that's probably more worried about deflation. And the other point 0:03:11.200 --> 0:03:16.160 that you mentioned and I think are are also important, 0:03:16.600 --> 0:03:20.320 but things like the wealth gap and the wealth divide. 0:03:20.440 --> 0:03:23.000 But there was a lot of pushback against the said 0:03:23.080 --> 0:03:27.080 acts financial crisis for contributing to the growing wealth gap. 0:03:27.360 --> 0:03:29.280 They can't worry about that right now. They have to 0:03:29.320 --> 0:03:32.799 worry about supporting the economy in the very short term, 0:03:32.880 --> 0:03:36.160 and then as the crisis, both the economic crisis and 0:03:36.200 --> 0:03:39.760 the health crisis subsides, then they can go to work 0:03:39.800 --> 0:03:42.320 and really dig into trying to look at some of 0:03:42.360 --> 0:03:45.720 those those issues that are more structural for the economy. 0:03:45.760 --> 0:03:47.720 But for the moment, they have to do everything they 0:03:47.720 --> 0:03:51.400 can to try and keep businesses and the consumer from imploding. 0:03:52.080 --> 0:03:55.560 Eric Powell does the press conference today is going to 0:03:55.600 --> 0:03:58.040 be a feeling of so many of our American listeners 0:03:58.480 --> 0:04:00.880 that he is the central banker to the world, whether 0:04:00.880 --> 0:04:04.560 it's Brazil or Ecuador or any of the other troubled nations. 0:04:04.600 --> 0:04:07.240 You've got a unique view on this. It's standard charter. 0:04:07.920 --> 0:04:12.280 What is the risk to the American major banks of 0:04:12.320 --> 0:04:15.080 an e M blowing up? I mean, as Chairman Powell 0:04:15.160 --> 0:04:18.520 during the press conference today, worried about the two big 0:04:18.560 --> 0:04:23.039 to fail American banks exposure to the e M world. 0:04:25.760 --> 0:04:28.680 And look, I would respond to that in a couple 0:04:28.720 --> 0:04:30.880 of ways. Tom. I mean, look, any time you have 0:04:31.480 --> 0:04:34.760 a global economic crisis, you're always going to be worried 0:04:34.800 --> 0:04:38.240 about the banks, not because you necessarily believe they have 0:04:38.400 --> 0:04:41.480 systemic risk, but because the banks are the facilitators of 0:04:41.600 --> 0:04:45.320 capital and liquidity. And you know, I think the big 0:04:45.360 --> 0:04:49.360 difference between today and thirteen years ago is that this 0:04:49.440 --> 0:04:53.480 crisis did not originate out of the financial system, and 0:04:53.560 --> 0:04:56.920 so as this economy starts to turn around went which 0:04:56.920 --> 0:04:59.080 it will at some point, and that's where the U 0:04:59.240 --> 0:05:02.480 S and global the FED and the other central banks 0:05:02.520 --> 0:05:06.640 around the world need the banking system to facilitate that recovery, 0:05:06.880 --> 0:05:09.240 to contribute to that recovery, and to make sure that 0:05:09.279 --> 0:05:13.840 monetary policy has distributed to the broader economy. So I 0:05:13.880 --> 0:05:16.080 think he will be worried in the sense that he 0:05:16.160 --> 0:05:19.159 wants to make sure the banking system, both domestically and 0:05:19.200 --> 0:05:22.640 internationally is working. But I think, you know, we have 0:05:22.760 --> 0:05:26.680 to recognize that the banks globally have raised a significant 0:05:26.680 --> 0:05:30.240 amount of excess capital and liquidity in reaction to what 0:05:30.360 --> 0:05:34.360 they experienced thirteen years ago. So will he be concerned, yes, 0:05:34.400 --> 0:05:37.240 but not because he thinks there's an imminent problem or 0:05:37.240 --> 0:05:40.240 crisis brewing. Let's turn to Europe. Eric, with regards to 0:05:40.279 --> 0:05:42.760 this conversation, what I'm hearing is we can grow away 0:05:43.080 --> 0:05:45.200 some of these problems. Europe has not been able to 0:05:45.240 --> 0:05:48.040 grow away the problems of the last ten years. As 0:05:48.080 --> 0:05:50.400 you look at Europe right now, to expect they can 0:05:50.440 --> 0:05:55.760 grow away the problems of the next five years. Look, 0:05:55.960 --> 0:06:00.000 it's a great point, it's a great challenge for Europe. Um, 0:06:00.160 --> 0:06:02.599 there's there's two problems there actually. I mean, when you 0:06:02.640 --> 0:06:07.599 take on a significant amount of debt, which which Europe 0:06:07.640 --> 0:06:10.040 did after the financial crisis, you hope that one of 0:06:10.080 --> 0:06:12.200 two things will happen. Either you grow your way out 0:06:12.200 --> 0:06:14.839 of it, as as you mentioned, or you can inflate 0:06:14.960 --> 0:06:16.720 your way out of it. And as we all know, 0:06:16.800 --> 0:06:21.000 Europe has has has lacked above trend growth for the 0:06:21.200 --> 0:06:23.640 same period of time, which also means they haven't been 0:06:23.680 --> 0:06:27.440 able to generate inflation. Um. So I think that will 0:06:27.480 --> 0:06:30.680 be something that is on people's minds because as we know, 0:06:31.480 --> 0:06:33.960 you know, the amount of debt being issued, the amount 0:06:34.000 --> 0:06:36.200 of debt being put onto the central bank and the 0:06:36.320 --> 0:06:40.240 national bank balance sheets is growing and and I think 0:06:40.240 --> 0:06:43.360 that raises some concerns about the lack of fiscal unity 0:06:43.400 --> 0:06:46.440 in Europe. We know we have a very competent central 0:06:46.440 --> 0:06:49.400 bank for at the ECB, but you don't have the 0:06:49.480 --> 0:06:53.839 equivalent fiscal authority in Europe that guides the broader EU economy. 0:06:53.880 --> 0:06:56.560 And I think that's still probably the biggest structural challenge 0:06:56.800 --> 0:06:59.880 that Europe is facing. So Eric does build on that. 0:07:00.320 --> 0:07:02.520 Do you have a sense that emerging from this crisis 0:07:02.520 --> 0:07:05.560 there'll be a stronger unity when it comes to the 0:07:05.600 --> 0:07:08.120 fiscal muscle of Europe. Or do you think that we're 0:07:08.120 --> 0:07:13.400 going to see an increased euro skepticism. I think it's 0:07:13.480 --> 0:07:17.200 I think we're already seeing the euro skepticism. Um. And 0:07:17.200 --> 0:07:22.240 in every time we have either an economic or political 0:07:22.320 --> 0:07:28.600 hiccup in the euro Area, you see the euro skepticism increase. UM. 0:07:28.640 --> 0:07:32.400 So this time is no different. UM. You know, Italy 0:07:33.160 --> 0:07:37.600 has its own both economic and health challenges. It looks 0:07:37.640 --> 0:07:41.080 like we're starting to see some improvement on the health side. UM. 0:07:41.120 --> 0:07:43.600 And it's no secret that, you know, Southern Europe is 0:07:44.080 --> 0:07:48.200 looking for a certain kind of fiscal support from the 0:07:48.240 --> 0:07:52.560 rest of Europe and their northern cousins are proposing or 0:07:52.640 --> 0:07:55.800 offering a different form of support. And this is where 0:07:55.800 --> 0:07:59.040 the lack of fiscal unity is. It's a real challenge 0:07:59.040 --> 0:08:01.520 and a real problem. UM. We would all like to 0:08:01.560 --> 0:08:05.320 believe that that a crisis brings them together, but I think, 0:08:05.680 --> 0:08:07.520 you know, I think the challenge is going to remain 0:08:07.560 --> 0:08:11.239 at the growth differentials, the intuation differentials, and the labor 0:08:11.280 --> 0:08:15.360 productivity differentials between the North and South remained very wide 0:08:15.000 --> 0:08:18.720 and challenge. And you think that we've got to leave 0:08:18.760 --> 0:08:21.000 it there. I apologize. I can hear you clearly at 0:08:21.000 --> 0:08:23.400 the end there. Eric Robertson stand a chan at Bank 0:08:23.520 --> 0:08:29.480 Global head of Research. Well, you need to know, folks. 0:08:29.520 --> 0:08:31.480 As I come out of my bedroom, there's a hallway 0:08:31.520 --> 0:08:34.079 with lots of economics books. If I don't trip over 0:08:34.160 --> 0:08:37.280 Vet Bill there. I am looking at Abel Berminanke, I'm 0:08:37.280 --> 0:08:40.000 looking at Michigan, I'm looking at ken Green and all 0:08:40.040 --> 0:08:45.120 the others thinking about the theories underlying economics. Randall Krosner 0:08:45.480 --> 0:08:49.760 is at Chicago in his expert on the foundations of 0:08:49.800 --> 0:08:53.160 our fellow Reserve System. Governor Crosster, thank you so much 0:08:53.200 --> 0:08:57.080 for joining us. What is the theory today the Chairman 0:08:57.200 --> 0:09:01.760 Powell's using at his press conference, is there is there 0:09:01.800 --> 0:09:05.360 a theory or a belief or a foundation given the 0:09:05.480 --> 0:09:11.120 size of this natural disaster. Well, I think he's going 0:09:11.160 --> 0:09:15.480 to be using the traditional tools, but obviously realizing that 0:09:15.520 --> 0:09:19.440 there's a lot of uncertainty and using and using those tools. Um. 0:09:19.440 --> 0:09:22.200 Clearly there's been a very negative demand shock as well 0:09:22.200 --> 0:09:26.720 as a negative supply shock, and both of those are 0:09:27.120 --> 0:09:31.400 going to mean that we're likely to see UM very 0:09:31.440 --> 0:09:37.600 low economic activity and UH and downward price pressure, and 0:09:37.640 --> 0:09:40.000 so he's going to be trying to use that framework 0:09:40.040 --> 0:09:44.040 for thinking about what tools have a disposal to set 0:09:44.080 --> 0:09:46.600 those Randy, when you left the FED coming out of 0:09:46.600 --> 0:09:49.679 the last financial crisis, did you ever think that this 0:09:49.760 --> 0:09:52.520 is where we would be ten years later, with the 0:09:52.520 --> 0:09:55.400 FED using all of the tools that is currently using 0:09:55.559 --> 0:09:58.360 all of the guidance the radical transparency. Did you ever 0:09:58.400 --> 0:10:03.680 see this Federal Reserve heading in that direction. Well, we'd 0:10:03.679 --> 0:10:06.160 set everything up so that it would make it easy 0:10:06.280 --> 0:10:08.320 to stand up some of those problems if they're a 0:10:08.360 --> 0:10:11.920 big shock to come. And although I'm generally an optimistic person, 0:10:11.960 --> 0:10:15.559 I'm also realist and realized that every once in a 0:10:15.559 --> 0:10:17.720 while there's going to be a big shock that comes. 0:10:18.040 --> 0:10:21.600 Did I anticipate this particularly shock, certainly, not um, But 0:10:21.760 --> 0:10:23.280 did I think that there would be shocked where the 0:10:23.320 --> 0:10:25.599 FID might have to stand up to these programs the 0:10:25.720 --> 0:10:29.560 last Yes, Randy. Given your position as a governor of 0:10:29.559 --> 0:10:32.600 the FED from two thousand six until two thousand and nine, 0:10:32.600 --> 0:10:37.080 you're uniquely positioned to be sort of a potential um 0:10:37.200 --> 0:10:39.360 fly on the wall in some of these discussions. And 0:10:39.360 --> 0:10:42.480 I have to wonder how much moral hazard is weighing 0:10:42.559 --> 0:10:44.719 on the minds of FED Chair J Powell and all 0:10:44.760 --> 0:10:48.599 of his peers. The idea that with their ongoing backstop 0:10:48.679 --> 0:10:51.880 of markets, they're encouraging investors to take more and more 0:10:52.000 --> 0:10:57.440 risk going into companies that perhaps shouldn't exist anymore. This 0:10:57.559 --> 0:10:59.800 is I think a very important part of the discussion, 0:10:59.840 --> 0:11:02.000 and I think you see the struggle with respect to 0:11:02.200 --> 0:11:05.320 the main street lending program for example. So this is 0:11:05.360 --> 0:11:07.160 a new area that the FED is going to get 0:11:07.240 --> 0:11:13.199 into financing small loans for for main street businesses or 0:11:13.280 --> 0:11:17.160 small and medium sized businesses. And what they want to 0:11:17.200 --> 0:11:20.040 do is have the banks retain five percent of the 0:11:20.160 --> 0:11:22.800 risk if something goes wrong, that they take the first 0:11:22.880 --> 0:11:25.760 five percent of loss. They try to minimize that moral 0:11:25.840 --> 0:11:28.280 hazard risk that someone just takes the money and run 0:11:29.040 --> 0:11:31.240 the challenges that they also want to get the money 0:11:31.240 --> 0:11:33.280 out really quickly. And if you want to get the 0:11:33.320 --> 0:11:36.560 money out quickly, um, that means you probably do less 0:11:36.600 --> 0:11:39.520 due diligence than you otherwise would. And that's why they're 0:11:39.520 --> 0:11:42.920 giving so much of a guarantee. And so the struggle 0:11:43.000 --> 0:11:45.360 there is do they go all the way. I'm speaking 0:11:45.400 --> 0:11:47.920 to you from from where I am in London, and 0:11:48.000 --> 0:11:50.960 they've had exactly this debate here whether they should have 0:11:51.760 --> 0:11:54.800 guarantee of these small business loans to get them out 0:11:54.880 --> 0:11:58.200 quickly or worry about the risks more and then they 0:11:58.240 --> 0:12:00.920 go out more slowly. Right, it was so important here. 0:12:00.960 --> 0:12:03.080 We talked to Rick Michigan, the former governor about this 0:12:03.120 --> 0:12:07.160 the other day as well. At some point the pandemic 0:12:07.400 --> 0:12:12.080 ends and then we have to reverse these processes. Can 0:12:12.120 --> 0:12:18.679 we do that with smooth glide pass? Very important question. Well, 0:12:18.720 --> 0:12:21.400 I don't think it's going to be just um a 0:12:21.520 --> 0:12:24.120 quick on and off. So I don't certainly think we've 0:12:24.160 --> 0:12:26.440 seen the V down, but I don't think we're just 0:12:26.480 --> 0:12:29.000 going to see a V back up. I think they're 0:12:29.040 --> 0:12:32.280 going to be fundamental changes to people's behavior, fundamental changes 0:12:32.320 --> 0:12:37.120 to supply changes, supplies um supply chains that are going 0:12:37.160 --> 0:12:40.720 to make it more difficult to have just a smooth recovery. 0:12:41.160 --> 0:12:43.360 That said, the FIT does have the tools at its 0:12:43.440 --> 0:12:47.600 disposal to withdraw some of the reserves and some liquidity 0:12:47.720 --> 0:12:50.240 that it puts in the system. Much like after the 0:12:50.640 --> 0:12:53.240 crisis a decade ago, people were very concerned that when 0:12:53.400 --> 0:12:57.000 fits balance sheet exploded to more than for trillion dollars 0:12:57.000 --> 0:13:00.079 for much less than a trillion before the crisis, that 0:13:00.120 --> 0:13:03.520 we'd have hyper inflation. Obviously we haven't over the last decade. 0:13:03.800 --> 0:13:06.760 If it has the tools to prevent that going forward, okay, 0:13:06.760 --> 0:13:10.120 they've got the tools going forward. But again, none of 0:13:10.200 --> 0:13:13.679 this at all is in the textbooks. You know, Steve 0:13:13.720 --> 0:13:16.360 Major today of HSBC model that we're going out to 0:13:16.480 --> 0:13:20.480 nine trillion in the seventeen trillion dollar economy. Do we 0:13:20.559 --> 0:13:23.600 just roll off the debt over the next twenty years 0:13:23.760 --> 0:13:28.440 or will there be an activists program to somehow bring 0:13:28.480 --> 0:13:33.080 down the depth bring down the balance sheet of the Fed. Well, 0:13:33.160 --> 0:13:36.520 that'll be very interesting to see. So obviously these questions 0:13:36.520 --> 0:13:40.679 arose when we went from eight billion dollars to more 0:13:40.720 --> 0:13:43.560 than four trillion dollars, and then the Fed was able 0:13:43.640 --> 0:13:46.480 to gradually reduce the size of the balance sheet. But 0:13:46.559 --> 0:13:49.720 then this other other shocks and tumults in the market 0:13:49.760 --> 0:13:53.679 that come along, and the balance sheet will grow um Obviously, 0:13:53.920 --> 0:13:58.120 when it starts to get to be or or or 0:13:58.200 --> 0:14:04.160 perhaps even of GDP, that may be more more challenging 0:14:04.240 --> 0:14:08.000 to coordinate. Bank of Japan has a balancing it's more 0:14:08.000 --> 0:14:09.920 than a hundred percent of GDP. Not that I think 0:14:09.960 --> 0:14:13.600 Bank of that Japan is the benchmark, but obviously they 0:14:13.640 --> 0:14:17.000 haven't had high inflation there. Does the deficit in America 0:14:17.080 --> 0:14:19.240 become a financial stability issue that the FET has to 0:14:19.840 --> 0:14:24.840 adapt and work around. It's certainly something that it thinks 0:14:24.920 --> 0:14:28.760 very carefully about because UM, interest rates obviously are low, 0:14:29.000 --> 0:14:33.480 and people are globally, both domestically and globally, are willing 0:14:33.560 --> 0:14:38.240 to to finance the very large expenditures that the US 0:14:38.280 --> 0:14:40.840 government is making right now. But of course that could 0:14:40.880 --> 0:14:43.480 change as the FT needs to take that into account, 0:14:43.480 --> 0:14:45.360 and does they take that into account and sort of 0:14:45.360 --> 0:14:48.280 it's longer run risk management planning. I think right now 0:14:48.280 --> 0:14:52.160 it's focused on making sure the economy, um, it doesn't 0:14:52.520 --> 0:14:56.960 contract more than it needs to, and um, we don't 0:14:57.000 --> 0:15:00.160 have a financial crisis that is on top of see 0:15:00.440 --> 0:15:03.840 the real shock that's come from this this health crisis. Randy, 0:15:03.840 --> 0:15:10.480 could you see a time when the FED buy stocks? Uh, Well, 0:15:10.520 --> 0:15:12.600 that would take an active Congress because they are not 0:15:12.600 --> 0:15:15.200 permitted to to do that. But I just mentioned the 0:15:15.200 --> 0:15:17.760 Bank of Japan, which is a very large purchaser of 0:15:17.760 --> 0:15:21.320 of equities. UM, I don't think. I think there are 0:15:21.320 --> 0:15:24.280 a lot of other assets that FIT can purchase, and 0:15:24.400 --> 0:15:26.480 I think it's wiser for the fit to stay out 0:15:26.480 --> 0:15:31.640 of the equity market. Not much left, Randy. Oh, there 0:15:31.640 --> 0:15:37.120 are a lot of assets that are out there. So 0:15:37.880 --> 0:15:39.400 what are we gonna do? Randy? I mean, you're the 0:15:39.400 --> 0:15:41.840 guy out and they're fine. You're the guy out of 0:15:41.840 --> 0:15:45.480 Brown University. Maybe we can corner the lobster market. Governor 0:15:45.520 --> 0:15:49.360 cross so much Randall crossing with us from London and 0:15:49.360 --> 0:15:53.600 of course always from the University Chicago, the wonderful mathematician, 0:15:53.640 --> 0:15:56.120 I should say, from Brown University. We said good morning 0:15:56.640 --> 0:16:02.560 to Rhode Island. This is gonna be sae as they 0:16:02.560 --> 0:16:06.760 stopped this recession. Absolutely, And of course you're folded over, 0:16:06.840 --> 0:16:10.320 folks into the classic equation. Why equals C plus I 0:16:10.560 --> 0:16:14.400 plus G plus all that trade noise and the preponderant 0:16:14.440 --> 0:16:18.000 weight is the consumer. He is expert it looking at 0:16:18.040 --> 0:16:21.640 the consumer of America. Stephen Stanley has won all sorts 0:16:21.640 --> 0:16:25.800 of forecasting awards and joins us from Amer's pier Pot. Stephen, 0:16:25.800 --> 0:16:28.080 it's awful early to gleam data. I know you're going 0:16:28.120 --> 0:16:30.800 to pounce through the data for Amer's pier pot. But 0:16:30.960 --> 0:16:34.560 what can we learn in this first quarter about the 0:16:34.680 --> 0:16:37.680 state of seventy of our g d P, the state 0:16:38.040 --> 0:16:42.240 of the American consumer. Yeah, well, obviously the consumer spending 0:16:42.280 --> 0:16:44.800 numbers are are the big source of the weakness in 0:16:44.880 --> 0:16:48.200 the in the data. UM. I think it's kind of 0:16:48.240 --> 0:16:50.840 incredible when you think about the fact that the economy 0:16:50.920 --> 0:16:54.800 was running pretty much on a normal footing for over 0:16:55.680 --> 0:16:58.040 of the first quarter, and it was really just around 0:16:58.040 --> 0:17:01.680 the middle of March when we UH initiated these lockdowns, 0:17:02.280 --> 0:17:04.640 and that was enough. That two week period was enough 0:17:04.680 --> 0:17:09.320 to drive consumer spending UH down over seven percent on 0:17:09.400 --> 0:17:12.639 the quarter and GDP down almost five I think it 0:17:12.840 --> 0:17:14.920 obviously tells you that Q two is going to be 0:17:15.240 --> 0:17:17.360 quite a bit worse because we're gonna have been locked 0:17:17.400 --> 0:17:20.200 down for much more than just two weeks. So, given 0:17:20.200 --> 0:17:23.320 that the personal consumption numbers came in so much worse 0:17:23.400 --> 0:17:27.560 than expected, more than twice as worse as expected, are 0:17:27.640 --> 0:17:30.560 you going to rethink some of the estimates that you 0:17:30.640 --> 0:17:35.120 have baked in for second quarter consumption and GDP expectations. Yeah, 0:17:35.160 --> 0:17:36.560 I think we'll have to take a look at that. 0:17:36.600 --> 0:17:39.119 We do get the March data tomorrow and and that 0:17:39.160 --> 0:17:42.399 will be helpful. Um. But yeah, I think you know 0:17:42.480 --> 0:17:44.720 there is a good chance that that will have to 0:17:44.800 --> 0:17:47.919 lower estimates for Q two as well, because if if 0:17:48.000 --> 0:17:50.119 marches down as much as it as it had to 0:17:50.160 --> 0:17:52.720 have been to get to that seven point six quarterly number, 0:17:53.040 --> 0:17:55.359 then presumably the April numbers are probably going to be 0:17:55.400 --> 0:17:59.000 that much weaker as well. We're all thinking about the recovery, 0:17:59.119 --> 0:18:01.920 the path of the recouver rate, the shape of that recovery. 0:18:02.000 --> 0:18:05.080 There's so much debate about a letter of the you 0:18:05.960 --> 0:18:10.200 w Stephen, how us understand that debate? Yeah? I mean, 0:18:10.400 --> 0:18:13.080 you know, it's it's just trying to get simple enough 0:18:13.200 --> 0:18:15.560 for for late people to understand. But I think that 0:18:15.680 --> 0:18:17.960 the trouble is that, uh, you know, we don't have 0:18:18.080 --> 0:18:21.400 enough letters or shapes in the alphabet to to get 0:18:21.440 --> 0:18:24.119 an accurate view of what we're really looking at. I mean, 0:18:24.160 --> 0:18:27.000 I think there really two two ways or two things 0:18:27.040 --> 0:18:29.720 to think about here. One is the timing of the 0:18:29.800 --> 0:18:33.560 recovery and how much do you initially get back so 0:18:33.960 --> 0:18:36.160 we're gonna have a bounce back when everything is open. 0:18:36.480 --> 0:18:38.959 Are we going to get back to where we were 0:18:39.000 --> 0:18:42.360 before the virus eight ninety? What is the number? Uh? 0:18:42.359 --> 0:18:44.560 And then the second question is what is the shape 0:18:44.560 --> 0:18:47.040 of the economy from there? Do we flatline once we 0:18:47.080 --> 0:18:50.480 get that initial rebound or do we continue to trend 0:18:50.560 --> 0:18:53.520 higher at a pace that would allow us to work 0:18:53.560 --> 0:18:56.520 down the unemployment rate and um and and get back 0:18:56.560 --> 0:18:59.399 closer to normal. The back end of the equation is 0:18:59.600 --> 0:19:02.960 n X. It's your export dynamics, folks, in your import dynamics. 0:19:02.960 --> 0:19:05.399 Steven Salley, do you have a clue what world trade 0:19:05.440 --> 0:19:10.480 is doing and how it rolls into the American economic experiment? Well, 0:19:10.520 --> 0:19:13.560 I mean the short answers, we know that trade is 0:19:13.960 --> 0:19:17.640 contracting along with everything else. Um. I think from from 0:19:17.640 --> 0:19:21.639 a GDP perspective, Um, the you know, the reality is 0:19:21.680 --> 0:19:24.080 that the US runs a big trade deficit. So our 0:19:24.119 --> 0:19:26.600 imports are much larger than our exports, so if they 0:19:26.640 --> 0:19:30.800 both fall by a similar amount, then the trade gat narrows. 0:19:30.920 --> 0:19:32.720 And that's what we saw in the first quarter, and 0:19:32.720 --> 0:19:35.040 we'll probably see it again in a second And then 0:19:35.040 --> 0:19:38.040 when the economy recovers, my guests is the trade GAPP 0:19:38.040 --> 0:19:41.320 will start to widen back out. But um, this is 0:19:41.359 --> 0:19:45.080 one of these big picture, longer term UH themes that 0:19:45.119 --> 0:19:46.879 we're going to be exploring for a long time. And 0:19:47.040 --> 0:19:48.720 it's not clear to me that that we're going to 0:19:48.840 --> 0:19:53.040 go back to the pre virus UH state of affairs 0:19:53.040 --> 0:19:55.240 in terms of global trade. I think, you know, countries 0:19:55.240 --> 0:19:57.119 are gonna want to keep things a little closer to 0:19:57.160 --> 0:20:00.480 home at the margin than before. But Steve, I want 0:20:00.480 --> 0:20:02.200 to go back to something that John was asking about, 0:20:02.240 --> 0:20:05.119 which is how we're going to emerge on the other side. 0:20:05.320 --> 0:20:09.359 And in this past economic expansion, the longest in US history, 0:20:09.440 --> 0:20:12.200 everyone was saying that the consumer really was holding up 0:20:12.240 --> 0:20:15.520 its back. Can we see a repeat of that given 0:20:15.560 --> 0:20:20.240 the demolition of household balance sheets that we're experiencing right now. Yeah, 0:20:20.280 --> 0:20:22.439 I mean, I think the big question here is really, 0:20:22.720 --> 0:20:26.040 you know, the government is going to extraordinary efforts to 0:20:26.200 --> 0:20:30.480 basically to fill in the loss of income for businesses 0:20:30.480 --> 0:20:36.200 and households that has accompanied this um set of shutdowns. 0:20:36.320 --> 0:20:38.520 And so we've got all these programs to put money 0:20:38.520 --> 0:20:41.240 in the pockets of households and all these programs to 0:20:41.320 --> 0:20:43.800 lend money to businesses. And the question is, when we 0:20:43.840 --> 0:20:46.920 get to the other side, have we effectively filled that hole? 0:20:47.560 --> 0:20:50.280 And if we have, then things can get back to 0:20:50.440 --> 0:20:53.680 something approaching a new normal. And if we haven't, then 0:20:53.720 --> 0:20:57.000 you start to see over time this morph into a 0:20:57.080 --> 0:21:00.480 more conventional recession where you've got high unemployed and people 0:21:00.520 --> 0:21:03.879 just don't have the wherewithal to spend, and I you know, 0:21:03.960 --> 0:21:05.680 I think the jury is still out on that at 0:21:05.680 --> 0:21:08.520 this point. Um, We've got a lot of stimulus in 0:21:08.560 --> 0:21:11.200 the system, or a lot of relief in the system, UM, 0:21:11.240 --> 0:21:13.919 but it's not clear just yet how effective it's all 0:21:13.920 --> 0:21:16.080 going to be. Stephen, let's turn to that stimulus and 0:21:16.119 --> 0:21:17.560 the feeder is of a little bit later. I caught 0:21:17.600 --> 0:21:19.960 up with Michael McKay earlier this morning and asked him 0:21:19.960 --> 0:21:22.160 what a virtual news conference will be like with chairm 0:21:22.240 --> 0:21:24.960 and Pal. Apparently you will be there on some kind 0:21:24.960 --> 0:21:28.159 of webcam asking questions of Chairman Pal a little bit 0:21:28.240 --> 0:21:30.600 late to this afternoon, if you have the opportunity to 0:21:30.600 --> 0:21:32.840 do so, what is the question you would like to 0:21:32.880 --> 0:21:36.600 ask today? Well, I think you know, the thing that 0:21:36.680 --> 0:21:39.360 everybody wants to know is the thing that the FED 0:21:39.400 --> 0:21:41.719 doesn't have an answer for, which is, you know, what 0:21:41.760 --> 0:21:43.639 does this thing look like a year from now, two 0:21:43.760 --> 0:21:46.040 years from now. I mean, everybody's kind of jumping the 0:21:46.080 --> 0:21:49.240 gun and they're talking about you know, forward guidance and 0:21:49.320 --> 0:21:52.800 your curve control and all these things that that would 0:21:53.119 --> 0:21:55.560 to do those sorts of things instead would have to 0:21:56.119 --> 0:21:59.800 know with a not certainty, but with a some of 0:21:59.800 --> 0:22:02.440 the grief confidence what this situation is going to look 0:22:02.480 --> 0:22:04.679 like in a year or two. So, I mean, I 0:22:04.720 --> 0:22:06.760 think we really have to limit our focus to the 0:22:06.880 --> 0:22:08.760 very short terms. I think that's where the feed is. 0:22:08.760 --> 0:22:10.919 They're just trying to get these programs up and running, 0:22:11.359 --> 0:22:13.719 and so you know, I mean, I I don't know 0:22:13.760 --> 0:22:15.479 that that he's going to talk a lot about this, 0:22:15.560 --> 0:22:17.800 but it would be interesting to know kind of what's 0:22:17.840 --> 0:22:22.439 holding up the you know, the opening up with some 0:22:22.560 --> 0:22:25.320