Fed Should Cut Rates Now: Narayana Kocherlakota

just rolled over. We've got the SMP down twenty and the Dow off two hundred. They were again for that first hour of the market kind of holding those small gains but uh not enough. Yeah, we're looking right now than has dacked down in tens of a percent, really tanking around. Uh you know, ten fifteen ten ten am. Would try to figure out what the catalyst was there, which headline it was for everyone to push the cell button. I'd sell it's a perfect set up for next guest.

Narianna cultural Lakota, former Minneapolis Fed president and Bloomberg opinion columnists, is also the professor of economics at the University of Rochester based in Rochester. Now, Rihanna, you wrote a really interesting column for or Bloomberg just yesterday kind of talking about how the FED should be aggressive not wait, maybe think about some pre emptive rate cuts to kind of get ahead of this coronavirus. I guess the question is would that even help? Would that matter given how low

rates are right now? Oh yeah, and thanks for having me on. Actually, I think given how low rates are right now, I'll really um makes the case even stronger for a preemptive move. UM. You know the basics thinking about UM let's emerged the last ten to fifteen years about what central banks should do when they're so close to the zero or bround, that is, when they're so close to being odd of tools, is to try to keep the economy as healthy as possible when faced with

the risk of a downturn or adverse shock. And I think the coronavirus is exactly an example that My benchmark outlook is one where UM, the the U S economy remains resilient, but there's downside risk, and the FED should I think the very sensitive that downside risk, given given how low rates are already, meaning given how little ammunition they have. Um, they really should be moving right now

to try to keep the economy as healthy as possible. Ariana, I just want to bring you this because we did note a real rollover in equity markets, and I asked Men Signerella, our macro strategist here at Bloomberg, and he was saying, there are a number of headlines about the virus, the coronavirus, hitting mainland Spain and Barcelona, as well as in Switzerland. So this idea that it's becoming more widespread

throughout the euro continent. I'm just wondering, from your perspective, the fact that this makes the case even more for the Federal Reserve to cut rates. What will that actually do, given the fact that it won't necessarily make people more incentivized to go out and spend money. I mean, if they're just pulling up and trying not to get sick. Uh. No, I think that what you you do by um, by cutting rates is uh in the in the in the

US is special. I think what you see when we've seen the last couple of days is flights to save havens. What that ends up doing is uh, the U S dollar is one of those safe havens. It pushes up the value of the dollar. And even if the US itself ends up not being affected greatly by the coronavirus, that appreciation of the dollar pulls the FED further away from its goals of UM two percent inflation. On the employment front, UH, if we can, if we by cutting rates,

the FED can get more Americans to spend. That offsets the falling demand for US goods and services that we will be seeing from overseas. So I think that this is all about trying to keep the U s economy as healthy as possible. Given this. Uh, given this negative shock, would fiscal stimulus be a better option um than more

rate cuts? Do you think? Well? You know, I'm completely supportive of what I heard from FED speakers last week who were putting out the case for Look, the FED doesn't have that many tools in the in the toolkit, so physical policy should be ready to roll if we were to get into, um a recessionary state or a

negative negative demand shock of some kind. UM. I don't think Congress is in that situation right now, but I certainly agree with my former FED colleagues who were laying out this case that, look, the FED only has a limited, limited tool kit would be great if physical policy UM it was clearly going to step in to make up

for that slack. Marianna, I would say that the bond market currently agrees with you that the Federal Reserve will or should be cutting rates potentially even three times by early next year, although perhaps disagrees in that there is a very dimnimous chance that they're going to cut rates on the March eighteenth meeting. The great cuts really are priced in to begin in June. I'm just wondering what

you said about incentivizing consumers to spend. Is that sort of the last tool because we're not necessarily seeing corporations borrow that much more despite record low borrowing costs. Is it really aimed at the consumer levering up to go buy cars or microwaves or whatever else. Yeah, I mean, uh, we incentivized consumers to buy UM through monetary policy, partly through by making borrowing cheap, but also by making savings unattractive.

So through both of those instruments, you're trying to incentivized spending. I've been disappointed by investment on the on the corporate side. I'm I'm not alone in that. Uh, that's really, um, you need some notion of I think better expectations about the long run than than the corporations appear to have, either in the US or in Europe, or in in China and Japan. I think that um it's long run diminished expectations are really keeping the lid on on corporate evolve.

With all due respect, though, I have to wonder if you say that in making savings less advantageous, does that just push people into risk your assets, risk your debt that's already treating at highly elevated prices, into equities that already are at historically high levels. There's going to be some of that on the there's someone set it to

do that. Although as you just pointed out, I mean equities are very expensive, um Um, So that that that that the fact that equities are so expensive should say to people, look, UM, I don't want to buy stocks. I might as well spend my money instead. So I think on on the margin, UM, all of this is on the margin, you are going to be able to stimulate spending and that will generate higher employment and um keep the FED closer to it's it's in inflation target.

So it's interesting now Jana, the FED open market can mid he holds its next meeting March or eighteen. Do you think they will wait till then or do you think they will act preemptively? Well, um, my column was a should column. It wasn't the scription what the Fed will actually do? Um? So I I thought that the Fed should move preemptively. I don't anticipate that they will. Um. I share the skepticism that they will move in in March.

I I think the Feeding yet again, has boxed itself into a quarter by saying, look, things are great, We're not gonna We're in a great position, and it means that by locking themselves in, by talking so much about that, it means a loss of face, a loss of quote unquote credibility of some kind for them to start to move,

to move right in either direction. We're speaking with Marianna Kutula Quota, former Minneapolis FED President, professor of economics at the University of Rochester, a Bloomberg opinion columnist, about his column that called for a preemptive rate cup by the FED to reserve. We should just mention that right now we are seeing a sell off inequities, although off earlier lows after starting the day positive with the losses led by the SMP down a little bit more than six

tenths of a percent. Arianna, I'm curious about the actual fundamental US economy in the state of it. We got some p m MY data on Friday that how to do with services in particular, that highlighted a degree of weakness that was really unexpected by economists and market players alike. I'm wondering what you make of that. Is there perhaps less momentum behind the US consumer than some people expect. I think they're, you know, as usual when you read

the tea leaves. I think there's some some strong positives of the labor market remains a real source of good news. UM. On the other hand, UM market tends to be a little bit backward looking at Maybe there's things you can see that that are more forward looking at that, UM give you cause, would give ones cause for concern. My own benchmark outlook is remains that. UM. You know, I'd like to see more growth, but I think we're gonna

see about two growth in this year. UM. That point, though, is when you're making policy, it's really not so much about your benchmark outlook as it is about the risks that outlook. And that's especially true when you're as close as you are to the zeroal are abound. All right. So just last thing, you know, we're always thinking about this feed is being data dependent. I wonder what day do you think they might be looking at now as it relates to the coronavirus. That might be a little

different than what they've done in the past. Yeah, I mean, I I think that's a tough question. I you know, I think that one of the things I'll be looking at, I suspect is what's going on in markets. I think that you see UM fear in markets, you see the imprint of fear in markets, and UM that fear is be a drag on the economy. And so I think that the FED will be looking at that in terms of actual hard numbers on on on the economic front. I really hope they don't wait to see those. And

I think last year they moved it away. UM. Their their interest rate cuts were less motivated by what was going on in the economy as opposed to a perception of risk the economy. That's exactly what I'm urging in the context of the coronavirus as well, and I hope they do that. Um. As I said, they again, I feel like they've used language to box themselves into a corner where it's hard. They're going to find it hard. They're gonna feel that it's hard for them to move

interest rates either up or down. Naranna cultural Lakota, former Minneapolis Fed President, Thank you so much for being with us. Uh Naryana is a professor of economics at the University of Rochester and a Bloomberg opinion columnist. Paul, we really noticed a market turnaround from what had been a positive start to the day. Yeah. And I think, as you mentioned earlier, it looks like seeing some reporting of some cases you know now not just Italy, but perhaps Spain

as well. Um. And so I think that just raises the concerns that a lot of investors have about how much of a potential is this to be a global pandemic which could impact global GDP. And I think that's kind of the risk we're seeing in the bond market. Um. You know, yields grinding lower in than the equity markets rolling over here. Yeah, this is just to be very clear, the who has not the World Health Organization has not deemed this yet. A pandemic, it is required that an

international agency like that give it that designation. However, we are seeing it spread beyond the borders of China and Japan and Korea, uh and Italy now to Switzerland, which is confirmed and also reports in Spain as well. The question is do you buy this dip? And Jim Pulson, chief investment strategistic Luthhold Group, has been watching closely and joins us now on the phone, Jim, do you buy here? Well? I uh, I think if you've been underweighted dramatically, you

might want to buy a little bit. But otherwise I think I'd stand pat here and let the let the fear sort of burn itself out here, uh for a few more days. You know. I think the coronavirus was the catalyst here, but I think this market would have found some catalyst. I mean, we've just had a tremendous run over the last year, and really we have not had a tempera set correction. We certainly could have here who knows, um, and that would not be at all

you know, uh surprising. Probably at some point would have found some catalysts to do that. Um. You know, and when you have these Steve drops. You know, the fear really escalates and the stories get get pretty scary. Uh personally, who knows. I'm no pandemic expert by any means, so

it could be a horrific outcome. I don't really know, but odds I think strong only favor that probably this epidemic will will start to fade a little bit here over the next several months, and and probably a lot of the spending that has been paused because of this, like in places like China, will catch up. And I still think that's the most likely outcome. It's not shocking to me that we have incidents in other parts of

the world. Heck, we had long before last week. We had incidents here in the United States and several other places in the world, so we knew, uh it was spreading. I just I'll be surprised, though, to some extent, if it gets nearly as bad elsewhere as it did in China, simply because China, you know, that was the outbreak and no one really knew what it was, and no one

expected that it was as bad as it was. Everywhere knows what this is from a standpoint that it's serious, and you know before it even gets bad, they've taken majors. I think that makes a difference, UM, where people have some warning to this as opposed to when it broken China. UM. So I you know, who knows, but you've never known these things. But I think underneath this, going into this UM coronavirus, we had an up tick in world economic growth.

Manufacturing was recovering around the world, growth in general was recovering. UM. We had r I s M pop backup of fifty. We had the s M and China pop backup of fifty. Right now, economic surprises have been on the positive side in most places around the world, including China, Emerging World, in the United States. So we had positive momentum going into this, which I think is a very good thing, as opposed to negative momentum that we might have had

last year of this hit. Ye. I certainly don't know, but but I would try to avoid uh, you know, panicking here. I think this whole is more a correction than the end of the cycle. Just to give you an update. Right now, all three major US equity indusicries down nearly one percent as Spain isolates a thousand people at an island hotel with the concern that there could

be the spread of coronavirus, Switzerland confirming its first case. Meanwhile, you're seeing in the bond market thirty year yields down uh to new loads of one point eight percent at one point seven percent now actually uh, and you're seeing rate cut bets increasing, with a lot of people speculating the FED could cut rate three times by the beginning of next year. That's exactly where I wanted to go, Lisa, Jim, what do you think the FED should do could do? Uh?

In response to some of the concerns that the coronavirus. Well, you know, it's uh, the market continues to go down. You know, I think the FED will probably come in and with the rate cut. Um. You know what does that do though, Well, I think it doesn't do much directly fundamentally um that we've already done. But I take does help confidence to some degree. One thing it would do is help take the inversion out of the yield curve,

which would help Wall Street confidence to some degree. I think, Um, you know, I I also think so that in many ways that coronavirus is you know, the understanding of the story here, that's the narrative. I really think a big part of what's going on is is the bond market and the fact that the thirty year yield broke to new lows last week and the ten year is doing so now or is very close. I think that's scaring a lot of traders and investors more even than the coronaviruses.

Is the breakdown and yields. What what does the bond market know that the stock market doesn't and and the fields break low below those levels? Is our yields in the United States headed negative? Like here's here's here's the sort of condundrum. Right. A lot of people say that the lower yields go on bonds in the United States, the more of a relative valuation case there is for equities.

And yet there is this sort of confidence factor where if bond yields head south, price up, yield down, especially at these levels, it indicates a flight to safety and a fear trade that makes people risk averse. So which

is it, right? I mean, which signal can you get that you're getting a better relative valuation and equities the lower that yields go, or that the bond market is telling you something kind of scary that you keep you away from risk assets well, the bond market has been telling is you know, uh, something scary for really since the end of two thousand eighteen, and it's also told us something scary in two thousand sixteen, and it also told us something scary in two thousand eleven and two

thousand thirteen. I mean, the bond market has been telling a scary story throughout this bowl market and uh, you know, it hasn't really been right in a lot of those. Now it could be right at some point, there's no doubt about that. But the fact that we've got a scary story coming from the stock market is nothing new in the last decade um, where it's been professionally setting new lows and suggesting something sinis or is underneath the surface. Um,

and we're doing that again. But you know, we did that at the end of the last manufacturing recession in two thousand sixteen as well, and the yields are about where they were, you know, and following it at this point then as well. So it's hard to know. I mean, the bottomark could be right, I'm not saying that, but it's not. It's not like this is a one off event that's never happened before. The bond market has been uh, you know, yelling fire for quite some time. Um, and

you know who knows who who is right. I just think it connotes fear more than anything else right now. And to me, I wouldn't necessarily run from that. I'm not sure i'd buy into it. I'd let's see a few days, see if this can find a bottom, But I wouldn't necessarily panic along with everyone else. Hey, Jim, thanks so much for joining us. We appreciate your thoughts and commentary. Jim Paulson, Chief investment STRATEGI just for the

Lithhole Group, joining us on the phone from Minneapolis. Presidential election is ramping up, and the concern remains from seen about the vulnerability of the campaigns and of the election itself to outside influences, most notably certainly from from Russia. To get a sense of kind of where we are today versus, we welcome Admiral James Turvidas. He's a columnist for Bloomberg Opinion, retired U S. Navy admiral and of course, former military commander of NATO. Adams Strevidis. Thank you so

much for joining us. We know you are busy. Let's start with the presidential election. Clear evidence that the election was influence, was hacked by the Russians. Is that risk still there today? In the entire U S intelligence community, all seventeen elements of it had attested to that in front of Congress, most recently in a somewhat controversial briefing. Uh. It is clearly a threat. And I'll give you three

quick things we got to focus on. One is local manipulation, actually going in and trying to work on balloting procedures. This is perhaps the most undefended portion of this that won't be manifest until November. Of course. Number two is going after the campaigns the way the Russians did in getting into emails, revealing insider detail to embarrass and deter campaigns.

And then number three what you alluded to, Paul, attempting to influence the campaigns by getting on social media social networks, creating thoughts that drive social media campaigns. So there are layer upon layer of ways in which Russia, Ken and I would suspect, will try and attack these elections. Admiral, given your experience within the military and the the security forces all around, how good is our defense to these

types of attacks now? Compared to two thousand sixteen. At least, I wish I could say it's, uh, it's much much better. I cannot. I would say that we are somewhat better because our technology and our tools coming out of the National Security Agency n s A are better, Our big banks are financials are telecom have improved. And then thirdly, a plus is that we're more aware of the threat than we were in But having said all of that, I would say our defenses are a C plus at best.

I wouldn't say they are going to get us in a or even to be and you know, in elections, that's our democracy. You only want to get an A

grade on the conduct of your democracy. So ad were one of the things that's been a theme for the Trump administration is generally not supportive of major parts of our intelligence community and apparatus, and you know, constant attacks on individuals as well as the UH the entities themselves have those as that position by the administration materially weakened US defenses as it relates to UM, you know, kind of cybersecurity and just overall intelligence UH support it has, unfortunately,

and it manifests in two different ways. Paul One is internally it's extremely discouraging to the intelligence community when they're denigrated, dilluded a moment ago to a brief being done behind closed doors, classified briefing up on the Hill, conducted by the intelligence community about concerns of the election coming forward. Um, this was attacked by the president. That's not helpful. If the president has views on this, you have to get

behind closed doors with the intelligence community. But um, it starts to buckle the morale inside the intelligence community when they perceive they're being attacked by the commander in chief. And then secondly, our allies are partners and our friends are watching this, and even worse, the Russians are watching this, and the Chinese and the Iranians and the North Koreans, and it gives them more license, more optimism that they can intrude in these elections if they see a split

between the executive branch and the intelligence community itself. So uh, not helpful. I wish the President would take his concerns, which may be legitimate at times, do it behind closed doors, don't do it in a way that reveals these kind of divisions. Admiral I want to just broaden out here. We have certainly the election coming up this November. The Democratic debates will be held tonight at a p m. Eastern.

But on a broader level, I'm wondering about the U. S IS alliances right now, especially as head towards potentially a more disruptive period of time, from a health perspective or an economic perspective. How close is the US to its allies versus say, two years ago. We have drifted away from UH some of our allies, most notably our

European allies and NATO. That creaking sound you hear from time to time, we is the Transatlantic bridge which is under allowed stress and strain as between the United States on one side and NATO on the other. I think, in fairness, we're still very very close to the Israelis to the Saudiast, were quite close with the Japanese. Are

South Korean alliance has had some stresses. I think the one I worry about the most is that US European relationship, because the Europeans matter collectively, that's the largest economy in the world, the European Union. Now with Great Britain leaving it, it's somewhat small oler than it was, but it's still an enormous economic and military capability. So as we look at challenges around the world, the military one certainly the

cyber ones. And you're absolutely correct. If this coronavirus continues to accelerate, we're going to need all hands on deck globally to deal with it. It's not a good time to be drifting away from our principal pool of allies, partners and friends, and that's Europe. And we'll just quickly, you know, on the election, simple question, why hasn't the US improved its election security just seems like it wouldn't

be that difficult. I think the simple answer to the question is because it is bifurcated between different elements of governance. So there are municipal and local elements, there are state elements, there are national elements to it. And then secondly, a continuing flaw in the US government is our inter agency still does not work together as well as it should. Department of Homeland Security, Department of Justice, Department of Defense,

National Security Agency. We haven't found a way to collectively bring them together. Last point, we have nobody in the cabinet of the United States who focuses on cybersecurity. We have a Department of agriculture. I'm sure that's useful, but we need a focus at the cabinet level that can bring all these stove pipes together. That's what's lacking. Paul.

Admiral James steffrid Is, thank you so much for being with us, columnist for Bloomberg Opinion or retired U S. Navy admiral and former military commander of NATO joining us. He's also the author of a book that was out last year, Sailing True North Ten Admirals and the Voyage of Character. H. Dina Meritus, also of the Fletcher School

of Law and Diplomacy at Tufts University. One stock that is not falling is Home Depot, although off its earlier highs, up now only one point three percent after beating estimates, and we want to dig into whether this is simply an interest rate story that has given a boost to the housing market, or if there is a message that we can take about the broader consumer and will wrap in Macy's as well joining us now to help do that.

As Craig Johnson, president of Customer Growth Partners, Craig, I want to start with Home Depot, the shares off earlier highs but still positive, which is remarkable on a day like today. How much do you think the story here is interest rates and how much is this organic demand for housing? Well, UM, this is the two companies important to our iconic names in retail, but they're clearly going

in different directions UM Home Depot. We think the interest rate element is a part of the picture, but the more important thing is the front. Changing and improving fundamentals in the housing market is the big driver UM. And the two key metrics we look at as UH home pricing and then home turnover existing home and over, and both of those are up. Prices are up six point eight percent year of a year at the latest read, and home turnover is up over nine about nine and

a half percent. Those are exceptionally good numbers and represent a sequential improvement over each of the last couple of months. And it's those two factors expectations of rising prices and secondly rising home turnover. Those are the key triggers to spending in terms of home improvement. And that's what that's what we think is driving to home deep performance. All right,

let's switch gears to Macy's. UM. You know, another tough quarter, stocks off three and a half percent here, the stocks down for this year and the past twelve months here, So it kind of goes back to that conundrum for these UH department stores led by the iconic name Macy's, what can they do to survive well UM Macy's challenge.

This is true across the department store retailers. There's lagging organic growth in the overall concept of a department show, which really hasn't the format hasn't really changed that much from when R. H. Maizie and Marshall Field created the

concept of hundred and seventy years ago. And the demand for department store shopping is simply down by the range of about UM of about one percent year of a year, and and so so we look at we look at what's happening is UH a decline in market share, department shares down to one percent, UH decline of one percent, And what we're seeing is that Macy's UM is trying to catch up to have his new operational pilaris concept where it tries to match cut its costs, so it's

in reduced capacity, so it matches the UH, so it matches the supply with demand, and so it's announced cutting of stores and questions, it's done this a little, it's a dollar late and a dollar short. Can we take any broader UH takeaway from the data that we've been getting out of Macy's. Not maybe Home Deepokes that's a particular story, but Macy's and some of the other retailers about the state of the US consumer, well, we think that the underlying state of the U s consumer is

is essentially healthy. To challenge for department stores is that's a segment of the market that is that it's it's in decline and it's been in decline for full generation. You go back to the late nineteen eighties, department stores comprised a full ten percent of the retail market. Now it's down to one one. It's it's exceptional. So it's you don't want to you don't you don't want to

estimate the number coming out of just Macy's. So we look at the overall UH picture, and you know, we just issued our our annual forecaster, and the overall forecast calls for growth at four point one percent, which is quite good, not spell it, but quite good. But you look at the department store sector and we're forecasting that is down about again about one percent decline. So, Craig, given that you know backdrop that outlook, one of the concepts that I'm fascinated with is the concept of the

US is still overstored. Um, despite the fact that we see Macy's and others closing stores by what magnitude do you think the industry still has to shrink. It's a physical footprint. Uh, we're guessing for the department store sector by about another This is a large number. It's simply the sector is still way over capacity. There's a lot of stores that you don't need. There's markets in Necutter you don't need ten stores and made many major faulting areas you can get by with five, six, seven, and

the same thing in smaller to mid sized markets. You don't need the number stores because the demand simply isn't there. And in Masa's case, just like the other department stores, you have too many retail square feet chasing too few customer fee and that's the core pro problem, got it um, And it's exacerbated as is online grows, which keeps growing year after year. Craig Johnson, thanks so much for joining us. We really appreciate your thoughts here on all Things Retail.

Thanks for listening to the Bloomberg pen L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa abram Woyds. I'm on Twitter at Lisa A. Bram Woyds. One Before the podcast, you can always catch us worldwide on Bloomberg Radio