Surveillance: Mester Says Fed Policy in Good Place

us now on Bloomberg Television and Radio. I'm pleased to say is the Cleveland Fed President Lauretta Mester, and of course my good colleague and friend, Bloomberg International Economics and Policy correspondent Michael McKee. President Mster, fantastic to have you with us again on this program. We've appreciating your time. Through much of this economy, in this recovery has continued. There is a real worry as we go deeper into winter about what happens with the momentum that we've built

up through the summer. Let's just start there, President Mster, what do you see and where do you see deceleration that concerns you right now out Well, there's no doubt about it that you said it. Well, there was a lot of momentum. In fact, the economy had come back stronger in the third quarter than many of us had thought it would. The economy just proved to be more resilient than than we had thought. UM. Despair across sectors. UM. Certainly, UM.

Some sectors that really need that face to face UM kind of commerce are not doing well at all. Other sectors are back to their pre pandemic levels or even beyond. I'm thinking autos, I'm thinking housing. So that disparity is troubling. We knew that things were going to slow down UM after the bounce back in the third quarter, and you're seeing that in the data. Now. UM, I am concerned

about the lack of fiscal policy. If you look back and to the beige book that we had going into the last fm C meeting, this is the compilation of all the contexts that we all um for prior to FLMC meetings. You'll see they had three concerns. One was what was going to happen to the virus in the fall, to what was gonna who was going to be the next president of the United States? Election uncertainty, and three

what was going to happen with fiscal policy? Because they were concerned without fiscal policy, things could get a lot worse. So one of those uncertainty has been resolved. The election uncertainty is resolved. But the virus case increase is very concerning, and the fact that we don't have a fiscal package is very concerning. So monetary policy, of course, has been you know, we've said we're using our tools, We're gonna

leave things very accommodative. We have interest rates essentially zero, we have UM asset purchases, and we have our thirteen three facilities that are helping to get UM credit flowing to households and businesses. But with the despaired impact of this pandemic, that's where fiscal policy plays a role, because fiscal policy can be really targeted two households and small businesses that really need the aid, and the states and local governments which have taken on a lot of the

burden here of helping. So I am concerned. Yesterday we had our Community Advisory Council meeting and these are representatives UM that are really on the ground in low and moderate income neighborhoods and and there's a real need for housing, affordable housing. Food security is an issue that's becoming more a little more problematic as the fall has gone on and the virus. You know, the case numbers are troubling.

So you see states um putting on restrictions, and even without states doing it, you can see in the mobility data that we look at that people themselves are being more restricted. Well exact, there doesn't seem to be any sign that Congress is going to do anything at least in the short run here. So does that mean you need to act, you need to do something at the December sixte meeting, Well, I think we're in a good place with our monetary policy because we are very accommodative.

That I think the need is going to be need to be a fiscal response because they need to be able to shore up the firms and the businesses that are really being hurt by the pandemic. And as I said, you can see some parts of the economy are doing very well and yet there's a lot of people still out of work. We have nine million people were not even back to where we were in February, So you know that disparity is really caused for a fiscal response.

And if you continue, if you look back at where we were at the start of this, the idea was to come in with strong fiscal policy which happened that cares at response and with monetary policy working in tandem right to try to get people through that period where the economy really had to shut down because of the surgeon the virus to make sure that we weren't overwhelming our medical system. We're kind of back to those levels now.

I mean a lot of the medical systems in different parts of the country now are really under a lot

of stress. And the idea that we're asking people to make a sacrifice again and not having that aid in place, I think it's going to be really burdensome on the economy going forward and certainly burnens them on the families um that that are bearing the brunt of the small business owners we talked to that are really, you know, having to live now through some restrictions that they don't know whether they're going to come out at the end or whether they're gonna have to shut down for good.

And I think these things are related in the sense that if you were a small business owner or a person with a job that has to go into work and you don't have that income security, right, it's hard to follow some of the restrictions. So you know, on. You know, you may be taking a little more risk because I don't have a job. If I don't go in, so I might have been exposed, possibly to someone who

had the virus not showing symptoms. I may go into work. Similarly, a small business rather than you know, you know, shutting down, if there's a number of people who might have been exposed, they're going to try to stay open because they don't really have a choice of the sense that if they don't stay open, they're going to go out of business. So income support I think it's needed for both to

help them get through. But I also think it affects how well we aren't following what the public health officials say are the right things to do to fight the virus. And I think that troubles me as well. Well, that's all well and good, but Wall Street is looking at this and saying, well, we're not going to get anything out of Washington, so we need to get something out of the Fed. Uh, the yield curve is steepened a

little bit. Maybe you need to turn out your holdings on the balance sheet or maybe do a little more QUEI do you think either of those things are called for at the December meeting. Well, I mean, I'm not going to pre judge the December meeting. We certainly at every meeting we go in we talk about where are police, he is calibrated, and what we need to do to make sure that we're adding accommodation and supporting the recovery.

But again, you know, you have to look across different sectors and sort of evaluate what tool can it help the most um to bring up the sectors that are you know, weakened in this and really affected by this. And it's not clear to me that monetary policy necessarily is the right tool to address those concerns. I grant you that, you know, right now it looks like the fiscal authorities are not going to come in with another package, but you also have to think about what was the

right tool to address this. And you know, to my mind, when you have a dispirit um, this such disparity across sectors, it's the fiscal authorities and that fiscal policy that is the right tool to use to address these things. And so that's what's sort of the tension here is that monetary policy is doing I think the right thing and keeping things very accommodative and yet we don't have the other side, and it's not an either or like one

can't substitute for for the other. Right, the reason it worked well in the beginning of the pandemic is they were working together. They weren't substitutes. They were reinforcing one another, pres Messa. One thing you could do, obviously, and I appreciate you're not here to pre judge the meeting, although we would love you too. One question that has been asked for people in fixed income markets at the moment is whether you would expect the average maturity of your

bond buying. I don't expect you to give me a decision on that, but could you tell me if you see the benefits in doing something like that. Well, I mean, as you know, from the the Great Financial Crisis and the Great Recession, right, we went in and bought long term assets to try to push down right the long end of the yield curve in terms of the yields there,

and that's a tool monetary policy. When we started the asset purchases in this environment, it was more about market dysfunction that we were being and the treasury market um and the mortgage backed security market. So the the actual catalyst UM was about that dysfunctions we were buying across the curve. UM. Of course those purchases also added accommodation, so they had a two twofold effect. UM. But you're right in the sense that there are things like, you know,

looking at UM, the maturities that we're buying UM. Clarifying our forward guidance on asset purchases UM can be helpful. You know, I'm a fan of you know, as clear communications as we can make them UM, so that people understand our reaction functions. So there are things like that,

UM that certainly would be under consideration UM. And that's that's you know, going forward, we're going to have those discussions that are needing just because with time for time is that something would discuss the next mate because we do understand the reaction function around interest rights very clearly. Now we don't un asset purchases. Is that something needs to clarify. Well, I certainly am always a fan of clarifying our communications. And you know, at every meeting we

talk about our communications as part of them. It comes out of the meeting that statement that you see. So that's gonna be a fundamental part of any fom C meeting, and I can't you know, say what will come out of the meeting, but I do think that it is an important part of how are we communicating our policy, compete to the markets, and do that American public understand why we're taking the actions we're taking um and including all our tools. You're doing a financial stability conference today.

The last Senior Loan Officers survey showed that banks were reporting weaker demand for business loans, and there were weaker demand and tighter standards for commercial real estate. Do we have a developing credit problem in this country? I don't think so far, but I think that that's one of the things when you're thinking about a resilient financial system, it's two fold. It's obviously you don't want your banks to fail. You want them to be robust through economic downturns.

But you also want the banks to be their lending through the downturn And as you know, we took some actions um early in the pandemic to try to ensure that the banks were there um and able to lend um to their to their customers and to households and businesses. So those are those actions were taken to ensure that credit could flow, and that the banking system was an important way of getting that credit flowing. So you know they're going to be looking, of course at credit risk,

and so far what's been. I think another strength of this economy is that losses and credit losses have not shown up at the banks um as much as they might have. And so that's a positive in this economy, is that we don't see the kinds of things that we might have expected to see um given the shock and the d shock of hand now it was, but we want to make sure that the financial system stays robust and resilience so that lending continued. President messed Up.

Always gracious with your time, and we appreciate it. Thank you so much for jo want to guess hopefully we'll catch up against soon before your end with us. Now with immediate and essential labor perspective. Patrick Foy, MTA Chairman and Chief executive officer, PET, I think you're lying to me I'm gonna cut to the chase In no way. Do I think you're only gonna cut nine thousand, three hundred or nine thousand, four hundred employees. What's the real number?

About six months? If you don't get support from the federal government. Well, tom UH is a number of operating personnel that would be cut. We would obviously cut headquarters. Headquarters staffing is down from there's more to cut their Those people aren't involved in a delivery of services. But we will be cutting we We've taken two point eight billion dollars out of the m t a's cost structure

over the last couple of years. I would expect in one apart from the service reductions, will take seven to eight hundred billion dollars. Additionally, we're gonna be constantly cutting UH and and reducing our costs because that's the that's

the right thing to do. When the service reductions are on top of that, and the service reductions are staggering, will affect every New Yorker, every one of our employees, and the rooting center at n y U says it will cost the region of four hundred and fifty thousand jobs and destroy about six five billion of regional GDP. And that what's so important here is the conflation of variable and fixed costs. And you've got all sorts of

realities including complexity, including union relationships, etcetera. What do we most get wrong about the fixedness of your variable costs. Excellent questions on and I'll distinguished between subways and buses right, Uh. Subways have extensive fixed capital cost that has to be maintained at For instance, if you reduce service on a subway line from a percent to eighty to sixty to forty, you may be able to cut the number of train operators and conductors. None of this is anything anybody at

the MTA wants to do. But the men and women who maintain the tracks, maintain the trains, communications power, etcetera. Will have to maintain that subway line regardless of whether ridership and the number of trains is forty or fifty percent or eight percent of normal. That is not the case, uh, in in a bus in a bus system, because you don't have that great fixed cost. And that is and obviously the operating leverage also associated with increases and ridership

increases in declines in in ridership your spot on. So a lot of people may be listening to this program from des Moyne or Cleveland or El Paso, and they're looking at a much problem transit authority that has forty six billion dollars of debt, and they wonder why should we be paying for the situation that currently is at hand, Albeit this is an extraordinary situation, but why should it fall on them? What would you say, so A Lisa,

I, I I say a bunch of things. France, As you mentioned Cleveland, there's mass transit in Cleveland, there's mass transit in Austin, Texas, in Atlanta and Washington, d C, in Chicago, San Francisco, Los Angeles, across the New Orleans, across the entire country, Blue States, Rent States. Mass transit is incredibly important. It happens to be that the MTA carries about of mass transit riders, so obviously we're a larger operation with

larger financial challenges. But every mass transit agency in the country has been affected by the pandemic, not to the same level of the m T A. Given our ridership UH on a typical day pre pandemic, we've carried seven point five seven point six million customers, largest in North America. But every one of the transit agencies in the United States is feeling the same pressure, and we'll have to

take steps not unlike those that we're talking about. No one if the MTA wants to make these service cuts because that's not what New York needs to feed the

economic recovery. And it's not it's not great service for first responders, essential employees, and our other customers and pat There's a question also about a spiral downward spiral for public transportation that if you don't have fast enough, reliable enough service that people stop using it and it just sort of begets even less service and fewer people using it, at what point does the m T a enter death spiral that could have an even more profound effect on

the entire region. Look, I think it's an excellent question, and the Rooting Centers analysis took that into account. But you're right, Lisa, if we have to win rese for instance, kateways the time between subways and buses on weekends to say fifteen or twenty minutes, a lot of New Yorkers are going to determine that to get to the to the job, to school, to a medical appointment or whatever they're doing, that it doesn't work for them any longer.

And it does. It does feed on it succel it's success. Success in mass transit and growth in mass transit increases ridership cutting it back also will cause some of our customers to say, you know why, it's not worth it. We won't get their revenue, we won't get their service. And that's just a terrible place for any transit agency

to be. Pet Boy, I would assume in your esteem career you seeing the death of New York City somewhere between three and five times, you know, And folks, I think a lot of people that know me know I was screaming after nine eleven that New York City would not die. I believe a mayor of New York had a little bit to do with that thought. Pet four, everybody's moving to the suburbs, what do you say to them? Well, look, not everybody's moving to the summer tom but he here's

what I'd say. Cities like New York, in London and Bombay, Mumbai and others have survived, have gone through pandemics in the past. Obviously the nineteen eighteen nineteen nineteen flew in the United States, which obviously had a significant impact on New York City. The the movement to urbanization across the entire globe is a global phenomenon. Uh the rise of cities as centers of talent and intellectual capital. New York City will be back. I'm bullish on New York City.

This is a particularly tough time, and twenty one or going to be tough years. But obviously with the great news from Fiser and Maderna and and the vaccines and the offing that will be terrific news, New York City will be back after getting through the dark days of twenty and twenty one, no question in my mind, Mr Fourth, thank you so much. Patrick Foyd with the m t A. He's chairman and chief executive. Let's get right to it here on the pandemic, and this is definitive. There's lots

of people managing the message right now. That is something Dr Jonathan Quick has never done. He's with the Rockefeller Foundation and is definitive in thinking about epidemics. This book, The End of Epidemic, is truly the bible on these modern processes. Dr Quick, thank you so much for joining us. How does a pandemic end? You and I really haven't lived on. I mean there was a collar in sixty seven,

I recall, but actually how does a pandemic end? So, I mean it's basically like a forest fire, and it either ends when it runs out of wood, which is us humans. Or it ends when there is a a response UM basically a dumping water all over it, which is what a UH safe and effective vaccine would do. And and those are the two ways that it that it can end. And right now, the good news is that we're we have seen um I think just remark

cobled news on the vaccine side. UM. But at the same time, UH, we're letting that that forest fire run uncontrolled in this country. And Dr Quick I say this with great respect for all watching and listening that has suffered this personally, particularly the essential workers and those that have lost older loved ones. Is the reason it maybe doesn't feel as angry is April or May, because we've

killed off so many old people. Is our pandemic demographic now different than it was in spring, Well, it is different than it was in the in the spring in the sense that UM, overall, we're seeing a fewer desper case because it is become a pandemic across all all generations, and we're seeing more of the youth. But I mean the reality is that we still have tens of millions

of people who are at risk. And UM, I think we need to understand the consequences of basic the inaction, because it's it's not just the fact that we're on we're on a pathway to be to be um to hit a death death of of nearly a half million people by well over four hundred thou people by March if we don't do something. That's one part of it.

The other is millions of people who who have had COVID who are going to have the lingering consequences we saw with the stars the first COVID, the one global in two thousand and three, and we're seeing it again today that perhaps a chord of the people have lingering disability. Not to mention the fact that letting this go out of control, um, it's people are not gonna feel safe

going aren't. They're not gonna feel safe in schools. So UM, I think we have a real challenge by just letting it run wild and and in the channel, and we know what to do and it doesn't involve crashing the economy. Well, hold on a second, because you say about the long term effects, you talk about how it's not just the deaths, it's that the prevalence could have Our ramifications far beyond even our comprehension. Now we have a quarter of a

million deaths here in the United States. The real issue is we don't even know where people are getting the virus at this point. Has track and trace died at this point given how pervasive COVID has become, Yeah, I mean the track of trace at this point is gonna be less important in the majority of places that that are having it. That's not true though, in in more focused settings like schools and workplaces, where we still have some opportunity. But overall, track and it's the key thing

is a handful of of core actions. Everybody masks restrictive suspend dangerous indoor places, limit gatherings over ten, stay home of symptomatic. This is provide leave and government help support business. I mean, it's not complicated, and we can't choose. It's not like it's a menu you choose one or the other. What we know clearly from nineteen eighteen and again now is doing all of these things together until we have bent the curve, and we could do it, and we

could do it without crashing the economy dr quick. This is an essential point because some people will look around and say the death rate is low even when we have a pervasive virus. Why not let it go rampant? Why shut down my social life? Why increase the incidence is of of depression and the widening gap and inequality and a whole host of other issues. What would you say to those people about some of the restrictions that have been coming out, basically saying these are harming us

more than helping us. So I think that the thing is to be focused with our with our restrictions and and recognize that yes, there is gonna be some some short term individual little sacrifice, um, but it's gonna be it's gonna pay off for the long term collective welfare because we're only accelerated. I mean when you're when you're getting up to um two death rates of of collect humuli death rates of one a thousand. But it's the

total effect of that on society. So it's really um taking a short term uh sacrifice for the collective long term benefit. Any concerning numbers, doctor, We've got to leave it that unfortunately, appreciate your time, said thank you that of the Rockefeller Foundation. We appreciate your time and look forward to getting you back soon. Here's the way it works, John, And this is true of everything in economics when you

have long, smooth curves. We've had a huge recovery and claims and down to a critical point where whatever moving averages you're using butters up right against the data. That thing is John, we are there right now. Is we wait to see what claims do in December, in January. That's a good precursor to bring in Nathan Sheets of PGM. He is a fixed income chief economist writing definitive international work for City Group a few years ago. And we're

thrilled to have Nathan Sheets with us from PJIMS this morning. Nathan, you know those curves, those oiler functions. Michael Woodford owns a high ground on this. We've got smooth curve showing us getting to recovery. Do you believe it? I think the the road recovery is likely to be quite rocky, unfortunately, and I think this was highlighted by the claims data

this morning. The virus and the restrictions are being put in place to fight the virus are likely to take a bide out of economic activity over the next say, three or four months. Now. I think the economy is more flexible than it was in the spring, and we've learned how to respond to restrictions uh more efficiently and smoothly, but still I think saved for the United States Q four in Q one growth are going to be struggling to to stay positive. If we get a small positive number,

we should consider ourselves fortunate. So it is true that in the long run, once we have this vaccine, we hit that smooth curve that you describe. And I think that the news on the vaccine is very encouraging, but especially without fiscal stimulus, the next few months are going to be challenging for the macro economy. Nathan, I gotta say I'm sort of surprised at the market response to

these jobless claims that came in worse than expected. It follows a trajectory including the retail sales we got earlier this week that also came in weaker than expected. The wave that we are seeing of this pandemic is hampering economic activity more than economists are currently projecting. Do you think the scarring the longer lasting effects of this uptick in the virus counts? Do you think that it's going to have a deeper effect on the economy than people

are currently giving credit to and beyond. The scarring question is one that's absolutely critical to think about. What are the longer term impacts of this episode on the labor market and workers skills, on the small business sector and the capacity of businesses to produce going forward, and importantly on household and corporate balance sheets and the willingness of

folks to spend going forward. Now on balanced, my sense is the what's likely to determine the scarring most most importantly is how long it takes to get the vaccine. And if we get that vaccine in the middle of the year, then I think that the scarring there will be some that will be more limited if if somehow the vaccine disappoints. Particularly I don't think now the science

of it is going to disappoint. Those results seem really strong, but there's still serious questions about distribution and about whether people will actually get the vaccine. So if the vaccine doesn't do what we expect, then I think the recovery will be much slower and the scarring is likely to be more intense and nic than. So many of us were so wrong about how quickly the U. S economy would bounce back and it's bounce back really quickly. How

do you model the second shock? Though? When an economy goes through one shock like the one we got back in March through eight prit into May, how do you model the second shock when it begins to bubble away again before our very own eyes, going difference of winds up. One of the critical aspects of allowing the economy to absorb the first shock as successfully as it has was

the powerful fiscal stimulus that Congress approved. And I think going through this second shock, the second UH phase of intense restrictions, what with what seems to be essentially no physical stimulus. And as you were discussing some of the other key safety NEP measures like the Renters moratorium rolling off the end of the year, if that's where we are, I think the economy is likely to be more exposed.

You know. On the other hand, as I said, I think that that that we're learning how to deal with this situation, and we're learning how to respond to lockdowns more more efficiently than we were before. And so it's a competing dynamic. But without stimulus and without Congress acting on some of these safety NEP measures, it's going to be a rough ride into the vaccine nthan how many people are great with you? Let me tell you that. Nathan shakes a page in Thanks for listening to the

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