Surveillance: Fed's Mester Says U.S. Reopening Will Take Time

I don't feel so quiet. Uh So I'm in this funky position because we've been expecting a relief rally and we got it right. We got a relief rally that is historic. We've retraced about fifty of what we've lost during the crash in March and that that really is extraordinary. So what you know, I'm trying to figure out if a tactical rally, meaning based on an over soul condition of hope, uh, if that's going to become a fundamental rally,

and I'm not clear on that at this point. I looked Tony at the equity markets and what I perceive as a narrowness of this rally. How narrow is narrow? Well? The last two days have seen the downside by him significantly outweighing the upside by him. So you had you had two really bad quote unquote market days, but megacap Tech was leading. So the thing that's the most interesting about that megacap Tech at this point is it's actually

considered defensive. So for those that have gone on offense, right. We we downgraded the market, as you guys know in January and expected once you got that panic low, which was identifiable, we expect the relief rally, and we got it. It's been a lot more than I thought it would be,

but the wrong groups are leading it. If you're if you're expecting a good fundamentally driven bull market, they usually are kicked off with small cap stocks leading, with offensive sectors like financials, industrials, consumer discretionary, with those areas leading, but they're lagging. So there's basically to make it very clear for the listeners, because this sounds really complicated coming

off of a major bear market low. You want to see the more aggressive areas do better, but that's not been the case in the rally, and that was evidence time, as you suggested, by the narrowness of the last couple of days, Tony. As you talk, it strikes me that perhaps we can look at this in another way that when we say the stock market is rallying despite the horrific data that we keep getting out of the real economy, perhaps this is a couple of key tech names that

are rallying well. The rest of the stocks completely lagged behind, the small caps down year to date, and it doesn't necessarily indicate anything positive, even hope for the economy and the month's ahead. Is that a better way to understand the rally that we're seeing in equities right now? Yes, it's really born out of an extreme oversoul condition when everybody got too bearish all at once, and that's what we identified as quote unquote the panic low. You know,

you have you kick off a human nature. There's times when human nature is the driver of the market activity, and then there's times for fundamentals. For the last ten years, it's been a fundamentally driven positive credit backdrop, good earnings driven rally. Right now, it's basically everybody got too shortened to too out of the market too quickly. Okay, but where are we right now on this Friday? Is everybody's

gonna go home? This weekend like John Farrow and trying to figure out what to do with their two oh one k. That's true, what's excuse lost my head? I went out yesterday for the first time in ten days. I was fully protected. Has yep. I know I had it has met yep. I had the two things on the side, and vet Ye tech came over to tech came over to tweak my No tech him over the instant vet build than me, Tony, I want to talk about what I do this weekend with my four oh

one k allocation. How enthused are you to reallocate right now, to rebalance right now? I'm not really enthused. I would have been down despite the economic backdrop, because that was down too far too fast. Now I think we've gone up too far too fast. So again, Tom, you do not want to bet against the guy's printing their money. The FED told you they're going to continue to support everything,

but stocks don't bet against. I would not bet against the market, but at this point I also wouldn't chase the kind of Relly, not just that it's over a very short period of time, but also the kind were Lisa engine. Small cap stocks are underperforming and the more economically sensitive sectors are also underperforming. Well, let's talk about what's working then, what's working really both in the United States and Europe, And you saw it pretty pronounced in

yesterday's price action I T and healthcare, what's lacking? What's uply financials and energy? You're just saying, stick with the stuff that's working. That's at this point, you would that would that's the leadership. Um, Honestly, I'd be pretty sector neutral right now. I think that there are there are times where you can have a high conviction call and there's times when you don't. And this is as you guys know, we've been doing this for a number of years.

I'm pretty happy to make a high conviction call when I have one. At this point, this is a tactical rally. UM, I don't think I would chase the strength and I think, uh, it's just a good time it to just be neutral and wait for more economic data. Sonny, always appreciate your honesty and thanks for it. Signed this morning, I hope you and you also doing pretty well, Tony to that of kind of cogenency for our audience worldwide on Bloomberg TV and on Bloomberg Radio. I'm very pleased to say that.

We're joined now by the president of the Cleveland Bank of the Federal Reserve, alongside Bloomberg's Michael McKee, who would join us for this interview. The Cleveland Fed president joined us now. The rdamester fantastic to catch up with you. I just want to reflect on the data that we've had for this economy because it has been brutal, twenty two million jobless claims in a single month, wiping out

a decade of jobs growth. I want you to help us understand how you see the future path for policy together with this recovery as these economies slowly normalize at the back end of this year. Yeah, so you're right, the data is very ugly. UM not unexpected given what we've decided as a country to do in the best interest of public health, which is of course social distancing and shutting down um in the medical expert tell us

that's the best way to control the virus. So what you've seen is all the numbers coming in basically reflect that shutdown and activity, the fact that many firms are furlowing workers. You see that in initial claims numbers, you see workers being laid off. This is very very painful for everyone. UM. Not only do you have to deal with illness and sickness, but then you also have to

worry about, um, your financial well being. So you know, small businesses throughout our district, in the fourth district the Midwest are telling us, you know, this is an incredibly unprecedented event for them. So I'm not that surprised about the actual numbers per se, because we we've engineered this shutdown. The question is going forward, can we put in policies?

And I think the said in the federal government have been trying to do this to get people from the economy that looked good in February through this pandemic shutdown period so that when economy begins to open up again, they have the wherewithal um to sort of have the

recovery come on board. And so a lot of the things that the SET is doing is to try and to make sure that there's a good foundation in terms of functioning markets, which of course is vital for an economy to get you know, credit UM and lending to the households and businesses that need it UM to reduce collateral damage UM and mitigate some of the impacts from the shutdown, so that when we get to the point where the economy reopens, the recovery is in the best

possible place it can be given this unprecedented shutdown and activity. Laretta, This is Michael. Um. When you talk about when we're going to open up, what are CEOs in your district and you're the heart of manufacturing country in the US. What are they telling you about the damage they see now and when they think they can reopen, and what the economy will look like when we do. Will they have customers? Well, they ramp up rapidly. What do you

see from Cleveland? Right, So we're all working on this right now. Um. As you know, Governor Dawine of Ohio is doing daily press conferences and he yesterday said that he's aiming for May first for some type of reopening. But of course that reopening is going to be done

very carefully in stage because no one wants to go backward. Um. And so really it's really thinking through now what those criteria would be, you know, And we have some examples of firms that did stay open as essential companies of how they've been able to do it, for example, grocery stores.

So taking some of the lessons about how do you do social distancing within a store, how do you do social distancing within a manufacturing plan, and trying to apply those So, you know, my view and talking to the firms is everyone realizes that everyone wants to kind of get back to work, but everyone realizes that how you do that u UM really is has to be done very carefully. And so we're you know, we expect to

see social distancing practices continue. UM certainly you know, uh, personal protective equipment like maths and gloves will be part of that. So it's got to be done very thoughtfully. Some things will be able to reopen that make it you know that can do social distancing more easily than others. UM. You wouldn't expect to see big conventions or or even uh, you know, conferences where you have people, um, a lot of people around. You have to be very careful about

how you do it. But everyone kind of has a goal of wanting to kind of get back to opening up activity. You know, partly because when you think about it, this is very painful for so you know, small businesses. UM, you know some of them have had to shut down, very painful for people that you know have you know, have lost their jobs in certain sectors are bearing the

brunt of this and so um. This is why I think you've seen unprecedented act and at both the federal Reserve and at the federal government level of trying to mitigate the negatives um on the economy from the appropriate policy of social distancing and shutting down the activity in order to get the virus under control. Well, do you think maybe markets are getting a little bit ahead of themselves in pricing in a very rapid recovery at this point, when do you think we start growing again and and

how quickly? Yeah? So, I mean, as you've seen, I think that there are going to be different parts of the country that are going to feel that they're capable of bringing back some businesses when the virus has kind of gotten to a point where the curve starts to flatten and then move down. So you're going to see that not all of businesses and not all parts of

the coming opening at the same time. So as that happens, you would expect to see at least in terms of numbers, in terms of percentages, looking like they're they're moving back up.

Right when you go from zero base to activity. You're going to see some increase in terms of the percentage rise in some of those numbers, but that nowhere need nowhere implies that, right we've made up what we lost by the shutdown, and so you know, you might see some of the numbers of like percentage grows an output looking like they're coming back, you know, maybe in the third quarters if things start to open up in certain areas, But again, that doesn't mean that you're truly back to

you know, activity, being back to normal. It's just gonna take time. Right if you're a manufacturing plant, um, and you don't have you know, supplies, um, it's gonna take time for you to kind of bring back your workers, you know, get the supply of inputs that you need to start picking out activity. And then of course it depends on what demand you're going to say, so I think it will take some time where the economy to

kind of pick back up. And right now we're in this still in the phase of making sure we get to that point without you know, as as best we can. We're trying to limit the damage, um, the economic damage, and get people so that they can sort of resume things in the best way possible, Lorendo, we're up against the clocks. I want to jump in and get as many questions in as possible if we can. I don't want to be toned deaf to what's happening in the markets.

Right now. We have a seventeen handle on w t I crude, we have some real risk and high yield space of defaults. Yet people have been encouraged to pile on that risk in the last week because the Federal Reserve has suggested it will go into high yield. Can you see why that's encouraging risky behavior at a time

when maybe we shouldn't be doing that. So we're in a you know, a real unprecedented, incredibly deep, deep shock to the economy, and I think if the Who's us, that the send to really use our tools as best we can to get us through this pandemic shutdown period, mitigating the negative impact on the economy so that the recovery can be as deaf as it can be when

we get to that point. Yes, we are moving into unprecedented territories, but remember we're trying to then lend a firms um that, through no fault of their own, were impacted by the virus, and so there are you know, we are going into, for example, UM corporate debt progments which we haven't done before UM, and we are going to include some fallen angels right that, you know, kind of investment grade rating before the virus sits. So you're right that we are doing things that we hadn't done before.

But at this point, I don't think we can be that concerned about UM those kind of moral hazards. I really think we have to really look at this is a hugely impactful and negatively impactful shock, and we have to do all we can to make sure that we're not doing permanent damage to the underlying fundamentals of the economy so that when the time comes and activity can pick up, we can get a d sent recovery out

of this. A lot of what you just said will make sense to a lot of people where people struggle, though, Loretta, and maybe you can help us. Buying double B credits that were triple B before this might make sense to tons of people. The huge employers buying high yield ETFs that have triple C credit in them, exposed to a very shaky energy sector that weren't on firm footing before this doesn't make sense, why the decision by jun ytfs. Yeah, so part of what we're doing and all the things

that we're doing are twofold. One is right. We're trying to make sure that the markets say functioning. So some of the efforts of the set is done right are really geared at market functioning and some of them are geared to make sure that right we mitigate the negative effects on households and businesses by making sure that we

have credit flowing to those businesses. So I look at the E t F. Part of that is a market functioning issue, um and so, and we're continuing need to look for gaps to make sure that our markets are functioning. And I would say that some of the efforts that we've taken already have improved functioning in the market. So

there's two things going on. One of us is making sure that and this is the FED responsibility, right, is to make sure that we have markets that are well functioning so that credit can flow right and do what it can to help shore up the economy to prepare

it for the recovery. So, you know, we can get and we can disagree on kind of what the right way to do that is, but part of what we're doing is to try to make sure that we have functioning financial markets precisely because those are an essential ingredient for the economy. For that any other policies that we do can flow through, so there's a transmission to the

households and businesses that need those fundings. We got about two minutes left Lare and I know that at this point the FED is all in doing everything it can to try to support the economy. When we get to that quarter maybe reopening and it's time to stimulate the economy, is there more you think you need to do or can do, and what would that be? So I think we're going to have to see how um, what it

looks like when we get there. I don't think we're up against any kind of constraint on what we can do, as you've seem that we we I think we acted um appropriately rapidly, um in an unprecedented rapidly way really because of the recognition of how deep this this shock was um and engineered because of the investment we're making in public health. Right. So when we get to that point, we're going to look at our tools do what we

can again. To support some of the programs that the federal government is doing UM in terms of like the p PP, the Paycheck Protection Program, etcetera. And then be prepared to use our tools as appropriate to make sure one market function and two that we're supporting the economy as we all nes do UM, so that we can get back to a normal sustainable growth with UM, full employment and price stability. And so that's what our goal is going to be. That's what our goals always are UM,

and we have tools to do that. We have forward guidings, we have our interest rate tools that we're doing right now at zero UM, and we're going to move those things around as appropriate UM to make sure that the economy can recover and get back to a sustainable growth path. Laura, we have to leave it that and I have to say thank you to you for your time a conversation.

We will continue la right amester that the President of the Federal Reserve Bank of Cleveland a special thanks to our already in some blind Bug TV and a blind Bug Radio. This is with our question, our definitive discussion this week and the microbiology and the virology of this endemic. Andrew Pallis is out of Rutger's in Pen He is at the Johns Hopkins University Bloomberg School of Public Health.

I should point out that Mr Bloomberg has provided philanthropy to his Johns Hopkins University, and of course as the founder of Bloomberg Gulp and this television and radio station. This is an extraordinary expert on microbiology and vera virology. Let's listen to Professor Pelkos. This virus is truly interesting in the sense that it causes this broad spectrum of diseases. So it's very true that the vast majority of people will suffer what we call sort of mild to moderate diseases,

maybe even know symptoms at all. But when you look at UM, the vulnerable portions of the population, the elderly, when you look at people with secondary medical conditions such as diabetes, heart disease, of a lung disease, and to be honest, even when you look at relatively healthy individuals UM, there are a significant a number of part of the population that has very severe disease requiring, if not a

hospital visit, um um admission into the hospital. So it runs in a huge spectrum in terms of how it presents after infection. I don't want to talk enzymes on a Friday, and I certainly don't want to talk RNA transcript taste and the other necessities of doing a test. But I would suggest, respectfully, doctor that America from a top down doesn't understand the sophisticated chemistry and biochemistry of tests. How hard is it to do a test and millions

of tests for this virus. So we know in a lot about the virus, and you certainly can do good testing. It requires not only a good test, but it also requires a good laboratory that's validated, that knows how to detesting, that knows how to do the controls, and knows how to show that they can reproducibly perform the tests well. So that's where it's really important to be focused in on public health agencies and medical institutions that know how

to do these tests. Professor Pekosh talk to us about reinfection and immunity. Are people that have had the virus really getting infected twice? Yeah? So right now, um, it's still a little bit unclear, but this is this gets back to the testing issue. Oftentimes, what I've seeing is people who are testing positive by the you know the test that tells you if you're infected, which is a PCR test that the text the virus. That doesn't necessarily

mean you've been reinfected. It may simply mean that there's small amounts of the virus that are still in your system UM from the infection that you've already controlled a few days ago or a week or so ago. So right now, there really is no good evidence to suggest that you're getting reinfected after your first exposure. May simply be that the virus is hanging around and you see vestiges of the virus there after you you've controlled the

initial infection. But it's something that's very important to understand as we think about rolling back in and coming UH leaving some of our public health interventions. Do we have a credible test to test immunity. There's gonna be a two part UH phase to that. Many of the tests that are out there will tell you if you've had an infection and if you have antibodies UM. Now that's important because that'll tell us how many people were infected

the first time this barus moves through the population. But most of those tests don't really tell you if you're protected from reinfection. That's going to take a second set of tests that are done more in laboratory settings that take a little bit of time to develop, but that will differentiate people who just have some antibodies to it versus the people that have antibodies that we think will

protect you from reinfection. We'd like to think that those are going to be very closely related, but we have to do those experiments to be percent sure that the rapid tests that people are establishing are really telling you that you're protected from infection or reinfection. Help me with reject the true or accept the false of this testing. How it risks is America to type one and type

two malfunction in our testing. So again it gets back to the laboratories that are doing the testing and making sure that the tests are being performed in m rigorous, controlled environments. UM. You can have two types of errors, right. You can have a false positive, meaning that you test positive when you really aren't infected UM And the other type of error is that you test negative when you

really are infected. And it's that latter group that's really the most important to be aware of because that really means that you're telling people who are infected that they can go back out in the population and behave you know, and not take extra precautions. And again, laboratories that know how to perform these tests do something called validation, right, so they go through and they test with known samples both types of error and report back what exactly they

expect those errors to be. Um other laboratories that are just sort of fly by night may not be reporting that rigorously. And that's where some of the danger comes in. With Francine Laquid and myself, he's with JOHNS. Hopkins University of Bloomberg School of Public Health. Jared Bernstein's listening to scoring. Why am I on faring say, scratching his head. Jared Bernstein knows that Vice President Biden of course will probably take Fargo. We'll see how that goes in the election.

Mr Bernstein was economic advisor to the Vice President in his definitive in Washington on policy years ago at the Economic Policy Institute and now the Center on Budget and Policy Priorities. Dr Bernstein is someone everybody reads right, left and in the middle as well. Jared John Farrell brought it up today, and John, as a British guy, doesn't understand the American ethos, the distrust of our federal system.

Will that maintain in the coming weeks, or can we get a federal statement of assistance to Americans like we knew in times long past. I think there are those who are very skeptical, as you suggested, of the government in normal times, But in times like this, people really do turn to the federal sector for the kinds of help we need meeting existential challenges precisely like this one. It's the same as in war time. One thing we've

certainly seen is a level of bipartisanship in Congress. You know, the Cares Act past nine six to zero in the Senate. When was the last time something like that happened? So, at least for now, I think many Americans walking around thinking we shouted government, and probably and probably thinking we need a more competent governance down the road. Jared, your work was path breaking a decade ago at the Economic Policy Institute of saying we need to get money into

people's hands at certain emergent times. Why is Washington so reticent about income replacement? Yeah? Well, I think the main reason for that is just a real skepticism about giving money to directly to people because of the fear that it will cause them to alter their labor supply. I think many American policymakers in our commist really overestimate that quote labor supply elasticity that says if you give people

a dollar, they're gonna work less. Well, in fact, most people in America, their paychecks are such that they just have to keep working if they're going to get by. And by the way, right now, we don't want people to go to work. So that's one of the reasons why folks really need to put that sort of older

thinking but behind behind right now. The usually statements Jared made by people who have never grown up around a working class environment and have no clue because most people, in fact, everybody I grew up with, wanted the job.

They didn't want to hand out from the government. And as you say, people are being told they have to stay at home, businesses are being told they have to shut makes me wonder why we're sitting here asking questions about why Congress won't top up the paycheck protection program for the small business administration. Jared, why are we even having the conversation and asking the question, Well, first of all, let me just say you're exactly right in the first

part of your comments right there. I started in some ways. I think I'm probably a rare economist, and that I started out as a social worker, and one of the first things I learned is that people simply can't begin to get by on the money they get, at least from the American social assistance system. May be different in

some other countries. Look, I think the scene in Congress right now is that both parties want to plus up the Paycheck Protection Act because frankly, that money got out the door really quickly and it's starting to meet some needs. But the Democrats want to add some other pieces that are quite necessary to the next phase of the stimulus plan, and the Republicans are resisting. So that's what they're squabbling

about right now. So, Jared, as we have that backdrop, we have the unemployment figures that keep coming out with jaw dropping numbers. Yesterday the sort of five point two million coming in a little low expectations, still mind blowing. And you're the perfect person to speak to about how quickly these jobs can come back. After your writing getting back to full employment in the state of Working America a decade of jobs lost in four weeks, how quickly

can we get them back? You know, it's really an epidemiological question more than an economic one. Probably more quickly than you'd think, because at least from the information we have, many of these folks are on a temporary layoff or furloughed. So we're there there's the potential to bounce back, but that can only happen. I believe if we get the green light, or at least the yellow light. That's more realistic, if we get the yellow light from health officials and

then from governors to do so. I do think that any reopening will be a very gradual one. But that's why the measures we were just talking about, these measures to help keep families and businesses kind of intact between now and then, so that there's an economy on the other side of this that's capable of bouncing back. Jared,

this is the key question. It's interesting to hear you say this because I've been reading a number of reports with people expecting the unemployment rate to remain at about ten percent for a prolonged period of time in the United States. Are you saying that those estimates are are perhaps a little bit too pessimistic. No, I mean, I think the unemployment rate is probably above ten percent now, and I think we'll be lucky if we if we peek out at I know that's a scary number, but

I think that's the fact that the case. What I'm saying is that if you look at some focus our friend jan hat C s Obert Goldman, they actually have kind of a V shape bounce back built in. But that's based on an assumption that we're doing a lot more testing and tracing than we're anywhere close to now. So I think the answer to your question is just conditional on getting the yellow light from the medical community. And if you read those folks, they're still quite skeptical

because we're so far behind the curb on testing. I just think that if we do the right thing in terms of social and stimulative policy, or maybe call it relief policy, to keep households in businesses at least somewhat intact, then at least we know when we get the yellow light, there'll be in a current it's capable of bouncing back on the other side. Jared, quickly, I've got to ask

the question. The world has changed, America has changed, what's the word steam prediction for what's a Burns Burnstein prescription for Vice President Biden? What's he need to do right now? You know, I thought President Obama said it well in his uh in his endorsement the other day, which is really worth watching because he actually gets into that precise question. Um, he said he wouldn't run on the same platform he did in oh eight. And we know that Biden has

been very influenced by his work with President Obama. So this is the time it gets back to your first question. This is the time where the country needs and wants an amply funded federal sector that is highly competent to meet the challenges we face repeatedly these days. Hundred day floods, the hundred year floods come every two years. Your sector. You know what I'm saying. I mean, we face real challenges, Jared, which, thank you so much, Jared Burnstein with us of course

as the Center on Budget and Policy for Priorities. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple podcast, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio.