Surveillance: The Fed's Toolbox With Kroszner

do they guide? Look? I think what the FED is going to tell us is that they remain ready, willing, able to do whatever they feel is necessary to continue to support the economy. Um They have shown over the last few weeks that they have probably moved away from trying to offer aid in a traditional meeting by meeting framework, and as their assessment of the economy, credit conditions and liquidity changes day to day, they reacts as they need to. So I agree with the assessment that we shouldn't be

expecting any major surprises. I think we'll get some guidance on on asset purchases, but you know, look, the Fed's balance sheets gone from just over four billions six and a half billions in very short orders. So, um, I don't think they're going to be telling us that they're going to be stopping, but I think we may get some guidance on on what the magnitude of asset purchases looks like going forward. Let's talk about that, Eric, have you settled on a number, a monthly number for purchases. No,

I haven't. I mean, look, you know, when the FED started this a few weeks ago, they were talking about daily numbers of asset purchases that you know, thirteen years ago, during the financial crisis, we would have assumed would have been a monthly number. Right. So the order of magnitude of what the FED is prepared to do uh today versus years past, it's just dramatically different. Um. I think the Fed's balance sheet is going to go, you know,

quite a bit wider and larger. They're already at about to g d P as I said, six and a half trillium. I can easily imagine them getting to seven or eight trillion by the end of the year. Eric, Let's talk about guidance a little bit further and dig in there as far as what the central bank is actually looking for. Is it inflation? Is it unemployment rates? Are they focused at all on the increasing wealth gap that we saw increasingly in focus post two thousand and eight.

Where how important is it to determine which of these factors that feeds really focused on. So I think, look, I think you can prioritize those um and I think this is how the FED is likely to be thinking about it. The first question point you made was inflation. Now we all know there's been a massive amount of demands, destruction and and a and a and a significant contraction in the economy in that environment, that that's not going to worry about inflation in the short term. If anything,

that's probably more worried about deflation. And the other point that you mentioned and I think are are also important, but things like the wealth gap and the wealth divide. But there was a lot of pushback against the said acts financial crisis for contributing to the growing wealth gap.

They can't worry about that right now. They have to worry about supporting the economy in the very short term, and then as the crisis, both the economic crisis and the health crisis subsides, then they can go to work and really dig into trying to look at some of those those issues that are more structural for the economy. But for the moment, they have to do everything they can to try and keep businesses and the consumer from imploding.

Eric Powell does the press conference today is going to be a feeling of so many of our American listeners that he is the central banker to the world, whether it's Brazil or Ecuador or any of the other troubled nations. You've got a unique view on this. It's standard charter. What is the risk to the American major banks of an e M blowing up? I mean, as Chairman Powell during the press conference today, worried about the two big to fail American banks exposure to the e M world.

And look, I would respond to that in a couple of ways. Tom. I mean, look, any time you have a global economic crisis, you're always going to be worried about the banks, not because you necessarily believe they have systemic risk, but because the banks are the facilitators of

capital and liquidity. And you know, I think the big difference between today and thirteen years ago is that this crisis did not originate out of the financial system, and so as this economy starts to turn around went which it will at some point, and that's where the U S and global the FED and the other central banks around the world need the banking system to facilitate that recovery, to contribute to that recovery, and to make sure that

monetary policy has distributed to the broader economy. So I think he will be worried in the sense that he wants to make sure the banking system, both domestically and internationally is working. But I think, you know, we have to recognize that the banks globally have raised a significant amount of excess capital and liquidity in reaction to what they experienced thirteen years ago. So will he be concerned, yes, but not because he thinks there's an imminent problem or

crisis brewing. Let's turn to Europe. Eric, with regards to this conversation, what I'm hearing is we can grow away some of these problems. Europe has not been able to grow away the problems of the last ten years. As you look at Europe right now, to expect they can grow away the problems of the next five years. Look, it's a great point, it's a great challenge for Europe. Um,

there's there's two problems there actually. I mean, when you take on a significant amount of debt, which which Europe did after the financial crisis, you hope that one of two things will happen. Either you grow your way out of it, as as you mentioned, or you can inflate your way out of it. And as we all know, Europe has has has lacked above trend growth for the same period of time, which also means they haven't been

able to generate inflation. Um. So I think that will be something that is on people's minds because as we know, you know, the amount of debt being issued, the amount of debt being put onto the central bank and the national bank balance sheets is growing and and I think that raises some concerns about the lack of fiscal unity in Europe. We know we have a very competent central bank for at the ECB, but you don't have the equivalent fiscal authority in Europe that guides the broader EU economy.

And I think that's still probably the biggest structural challenge that Europe is facing. So Eric does build on that. Do you have a sense that emerging from this crisis there'll be a stronger unity when it comes to the fiscal muscle of Europe. Or do you think that we're going to see an increased euro skepticism. I think it's I think we're already seeing the euro skepticism. Um. And in every time we have either an economic or political

hiccup in the euro Area, you see the euro skepticism increase. UM. So this time is no different. UM. You know, Italy has its own both economic and health challenges. It looks like we're starting to see some improvement on the health side. UM. And it's no secret that, you know, Southern Europe is looking for a certain kind of fiscal support from the rest of Europe and their northern cousins are proposing or offering a different form of support. And this is where

the lack of fiscal unity is. It's a real challenge and a real problem. UM. We would all like to believe that that a crisis brings them together, but I think, you know, I think the challenge is going to remain at the growth differentials, the intuation differentials, and the labor productivity differentials between the North and South remained very wide and challenge. And you think that we've got to leave it there. I apologize. I can hear you clearly at

the end there. Eric Robertson stand a chan at Bank Global head of Research. Well, you need to know, folks. As I come out of my bedroom, there's a hallway with lots of economics books. If I don't trip over Vet Bill there. I am looking at Abel Berminanke, I'm looking at Michigan, I'm looking at ken Green and all the others thinking about the theories underlying economics. Randall Krosner is at Chicago in his expert on the foundations of

our fellow Reserve System. Governor Crosster, thank you so much for joining us. What is the theory today the Chairman Powell's using at his press conference, is there is there a theory or a belief or a foundation given the size of this natural disaster. Well, I think he's going to be using the traditional tools, but obviously realizing that

there's a lot of uncertainty and using and using those tools. Um. Clearly there's been a very negative demand shock as well as a negative supply shock, and both of those are going to mean that we're likely to see UM very low economic activity and UH and downward price pressure, and so he's going to be trying to use that framework for thinking about what tools have a disposal to set those Randy, when you left the FED coming out of the last financial crisis, did you ever think that this

is where we would be ten years later, with the FED using all of the tools that is currently using all of the guidance the radical transparency. Did you ever see this Federal Reserve heading in that direction. Well, we'd set everything up so that it would make it easy to stand up some of those problems if they're a big shock to come. And although I'm generally an optimistic person, I'm also realist and realized that every once in a while there's going to be a big shock that comes.

Did I anticipate this particularly shock, certainly, not um, But did I think that there would be shocked where the FID might have to stand up to these programs the last Yes, Randy. Given your position as a governor of the FED from two thousand six until two thousand and nine, you're uniquely positioned to be sort of a potential um fly on the wall in some of these discussions. And I have to wonder how much moral hazard is weighing on the minds of FED Chair J Powell and all

of his peers. The idea that with their ongoing backstop of markets, they're encouraging investors to take more and more risk going into companies that perhaps shouldn't exist anymore. This is I think a very important part of the discussion, and I think you see the struggle with respect to the main street lending program for example. So this is a new area that the FED is going to get into financing small loans for for main street businesses or

small and medium sized businesses. And what they want to do is have the banks retain five percent of the risk if something goes wrong, that they take the first five percent of loss. They try to minimize that moral hazard risk that someone just takes the money and run the challenges that they also want to get the money out really quickly. And if you want to get the money out quickly, um, that means you probably do less due diligence than you otherwise would. And that's why they're

giving so much of a guarantee. And so the struggle there is do they go all the way. I'm speaking to you from from where I am in London, and they've had exactly this debate here whether they should have guarantee of these small business loans to get them out quickly or worry about the risks more and then they go out more slowly. Right, it was so important here. We talked to Rick Michigan, the former governor about this the other day as well. At some point the pandemic

ends and then we have to reverse these processes. Can we do that with smooth glide pass? Very important question. Well, I don't think it's going to be just um a quick on and off. So I don't certainly think we've seen the V down, but I don't think we're just going to see a V back up. I think they're going to be fundamental changes to people's behavior, fundamental changes to supply changes, supplies um supply chains that are going to make it more difficult to have just a smooth recovery.

That said, the FIT does have the tools at its disposal to withdraw some of the reserves and some liquidity that it puts in the system. Much like after the crisis a decade ago, people were very concerned that when fits balance sheet exploded to more than for trillion dollars for much less than a trillion before the crisis, that we'd have hyper inflation. Obviously we haven't over the last decade. If it has the tools to prevent that going forward, okay,

they've got the tools going forward. But again, none of this at all is in the textbooks. You know, Steve Major today of HSBC model that we're going out to nine trillion in the seventeen trillion dollar economy. Do we just roll off the debt over the next twenty years or will there be an activists program to somehow bring down the depth bring down the balance sheet of the Fed. Well,

that'll be very interesting to see. So obviously these questions arose when we went from eight billion dollars to more than four trillion dollars, and then the Fed was able to gradually reduce the size of the balance sheet. But then this other other shocks and tumults in the market that come along, and the balance sheet will grow um Obviously, when it starts to get to be or or or perhaps even of GDP, that may be more more challenging to coordinate. Bank of Japan has a balancing it's more

than a hundred percent of GDP. Not that I think Bank of that Japan is the benchmark, but obviously they haven't had high inflation there. Does the deficit in America become a financial stability issue that the FET has to adapt and work around. It's certainly something that it thinks very carefully about because UM, interest rates obviously are low, and people are globally, both domestically and globally, are willing to to finance the very large expenditures that the US

government is making right now. But of course that could change as the FT needs to take that into account, and does they take that into account and sort of it's longer run risk management planning. I think right now it's focused on making sure the economy, um, it doesn't contract more than it needs to, and um, we don't have a financial crisis that is on top of see the real shock that's come from this this health crisis. Randy,

could you see a time when the FED buy stocks? Uh, Well, that would take an active Congress because they are not permitted to to do that. But I just mentioned the Bank of Japan, which is a very large purchaser of of equities. UM, I don't think. I think there are a lot of other assets that FIT can purchase, and I think it's wiser for the fit to stay out of the equity market. Not much left, Randy. Oh, there are a lot of assets that are out there. So what are we gonna do? Randy? I mean, you're the

guy out and they're fine. You're the guy out of Brown University. Maybe we can corner the lobster market. Governor cross so much Randall crossing with us from London and of course always from the University Chicago, the wonderful mathematician, I should say, from Brown University. We said good morning to Rhode Island. This is gonna be sae as they stopped this recession. Absolutely, And of course you're folded over,

folks into the classic equation. Why equals C plus I plus G plus all that trade noise and the preponderant weight is the consumer. He is expert it looking at the consumer of America. Stephen Stanley has won all sorts of forecasting awards and joins us from Amer's pier Pot. Stephen, it's awful early to gleam data. I know you're going to pounce through the data for Amer's pier pot. But what can we learn in this first quarter about the state of seventy of our g d P, the state

of the American consumer. Yeah, well, obviously the consumer spending numbers are are the big source of the weakness in the in the data. UM. I think it's kind of incredible when you think about the fact that the economy was running pretty much on a normal footing for over of the first quarter, and it was really just around the middle of March when we UH initiated these lockdowns,

and that was enough. That two week period was enough to drive consumer spending UH down over seven percent on the quarter and GDP down almost five I think it obviously tells you that Q two is going to be quite a bit worse because we're gonna have been locked down for much more than just two weeks. So, given that the personal consumption numbers came in so much worse than expected, more than twice as worse as expected, are you going to rethink some of the estimates that you

have baked in for second quarter consumption and GDP expectations. Yeah, I think we'll have to take a look at that. We do get the March data tomorrow and and that will be helpful. Um. But yeah, I think you know there is a good chance that that will have to lower estimates for Q two as well, because if if marches down as much as it as it had to have been to get to that seven point six quarterly number, then presumably the April numbers are probably going to be

that much weaker as well. We're all thinking about the recovery, the path of the recouver rate, the shape of that recovery. There's so much debate about a letter of the you w Stephen, how us understand that debate? Yeah? I mean, you know, it's it's just trying to get simple enough for for late people to understand. But I think that the trouble is that, uh, you know, we don't have enough letters or shapes in the alphabet to to get

an accurate view of what we're really looking at. I mean, I think there really two two ways or two things to think about here. One is the timing of the recovery and how much do you initially get back so we're gonna have a bounce back when everything is open. Are we going to get back to where we were before the virus eight ninety? What is the number? Uh? And then the second question is what is the shape

of the economy from there? Do we flatline once we get that initial rebound or do we continue to trend higher at a pace that would allow us to work down the unemployment rate and um and and get back closer to normal. The back end of the equation is n X. It's your export dynamics, folks, in your import dynamics. Steven Salley, do you have a clue what world trade is doing and how it rolls into the American economic experiment? Well, I mean the short answers, we know that trade is

contracting along with everything else. Um. I think from from a GDP perspective, Um, the you know, the reality is that the US runs a big trade deficit. So our imports are much larger than our exports, so if they both fall by a similar amount, then the trade gat narrows. And that's what we saw in the first quarter, and we'll probably see it again in a second And then when the economy recovers, my guests is the trade GAPP

will start to widen back out. But um, this is one of these big picture, longer term UH themes that we're going to be exploring for a long time. And it's not clear to me that that we're going to go back to the pre virus UH state of affairs in terms of global trade. I think, you know, countries are gonna want to keep things a little closer to home at the margin than before. But Steve, I want to go back to something that John was asking about, which is how we're going to emerge on the other side.

And in this past economic expansion, the longest in US history, everyone was saying that the consumer really was holding up its back. Can we see a repeat of that given the demolition of household balance sheets that we're experiencing right now. Yeah, I mean, I think the big question here is really, you know, the government is going to extraordinary efforts to basically to fill in the loss of income for businesses and households that has accompanied this um set of shutdowns.

And so we've got all these programs to put money in the pockets of households and all these programs to lend money to businesses. And the question is, when we get to the other side, have we effectively filled that hole? And if we have, then things can get back to

something approaching a new normal. And if we haven't, then you start to see over time this morph into a more conventional recession where you've got high unemployed and people just don't have the wherewithal to spend, and I you know, I think the jury is still out on that at this point. Um, We've got a lot of stimulus in the system, or a lot of relief in the system, UM, but it's not clear just yet how effective it's all going to be. Stephen, let's turn to that stimulus and

the feeder is of a little bit later. I caught up with Michael McKay earlier this morning and asked him what a virtual news conference will be like with chairm and Pal. Apparently you will be there on some kind of webcam asking questions of Chairman Pal a little bit late to this afternoon, if you have the opportunity to do so, what is the question you would like to

ask today? Well, I think you know, the thing that everybody wants to know is the thing that the FED doesn't have an answer for, which is, you know, what does this thing look like a year from now, two

years from now. I mean, everybody's kind of jumping the gun and they're talking about you know, forward guidance and your curve control and all these things that that would to do those sorts of things instead would have to know with a not certainty, but with a some of the grief confidence what this situation is going to look like in a year or two. So, I mean, I think we really have to limit our focus to the very short terms. I think that's where the feed is.

They're just trying to get these programs up and running, and so you know, I mean, I I don't know that that he's going to talk a lot about this, but it would be interesting to know kind of what's holding up the you know, the opening up with some of these big facilities that they're working on, and and what are the problems that they're uh seeing and how that might you know, what implications that might have for whether those programs are ultimately going to be effective. CE

sailing very quickly. Here is this a united fat I mean, I don't mean the the silliness of dissent votes and all that, but you know, they go into the equals building or the virtual equals building, that big virtual table they're going to virtually sit at. Great are they united? I think they are. I mean, you know, you've heard a pretty pretty united front in terms of the response so far from hawks and from doves. I think what sets this off from the financial crisis is that there

are no bad guys here. Um. You know, in two thousand and eight, a lot of the bailouts and UM things were very controversial because you're creating moral hazard. You're you're helping out people who may be acted badly, and there is no one like that this time. And so you know, Chairman Powell has made the point, there's really not a moral hazard issue here because we're just trying

to make everyone hold. No one is to blame, um, and you know, the hope is that these programs will kind of keep us back to where we were as which as possible before the virus terrific A real subtle update, Thank you so much, Stephen Stanley with AMers Pierre Punt. Over the last number of days, folks, we've talked with so many officials from Johns Hopkins Universities, those in different parts of j h U, those doing pure research, and those in the trenches. Lauren Simple is in the trenches.

She is in emergency medicine, and that's of course a very important part of what j h YOU was doing right now, the challenges of Baltimore, Maryland, and of course the challenges of this virus. Our conversation earlier this morning with Lauren. Testings absolutely the underpinning of everything else that we need to do. So while we're getting better with testing, we still have a long way to go, and we

we really need to keep laser focus on that. On the medications, we're seeing a lot of progress where UM seeing vaccine progress, which is great to hear because that is going to be a key to long term UM fighting of this disease. But again, a lot of a lot of ways to go. What do you find that you know the most reassuring and the most concerning about testing? How much more testing do we need in the US,

And are the test reliable right now? The point of care diagnostics are getting better UM, and they're getting you picked up more broadly. UM. We still have major issue with the supply chain around testing, so we still need the reagents, the materials that we need to run the test. We still have issues with the swabs, and we still have to focus on making sure that we don't just

have enough test but they're in the right place. Because the key to reopening and the key to getting back to work is making sure that the tests are distributed in a way that we can detect UM where clusters may pop up. More new outbreaks. Maker, Lord, let's go to your core competencies, which is emergency medicine. Okay, So we're gonna have emergency rooms in May, in August, in October across this nation where people are gonna walk in the door because you know, afterthoughts stubbed or tow or

somebody broken arm, etcetera, etcetera. We're going to test all those people for the virus, aren't we. That's the hope, um, so that we can move them into the hospital and get them the care they need without putting them them at risk, putting our other healthcare workers at risk, and

putting our other patients at risk. So the idea would be as as people who don't show symptoms of COVID nineteen come into the hospit, but we would put them in a different part of the hospital and still be able to safely care for them while we're caring for COVID nineteen and while we're still dealing with having COVID nineteen out in the community. Well, you know, I look,

Lauren at this, and you know the huge challenges. I'm right here by Mount Sinai on the Upper East Side in New York, and you can just see it in the faces of the people. Are we going to end up with two emergency rooms to hospitals? UM? I hope that we aren't. I think we we can't distribute our clinicians like that, we can't distribute our resources like that.

I think we hope that this will become a disease that we can manage with tools like we have for other diseases that UM that make people really sick, like flu, like HIV, like a bunch of different diseases. UM, where we can find people who have it early, UM, safely care for them without putting others at risk, and that our supply chain and our resources allow for that. Give us a scope and scale at the Johns Hopkins University right now, can we say that you look forward to

a May that will be improved from April? I do hope so. UM. I think we're seeing a slowdown in our cases and UM, we're starting to feel that pressure release a little bit. But that's the time to be vigilant and not let our guard down, because we will see spikes in cases, especially as people relax their social distancing practices, as they try to go back to work, as they UM, you know, just get tired of being

at home and make different choices. So we have to we have to remember that just because we're seeing that slow down in cases doesn't mean this is over and doesn't mean that we suddenly have a tool kit full of tools to fight this. So we have to be protective. We have to follow those social distancings still and it does get hard, and UM, I think we have to remind each other that it's still really important. Laurence so our experts on emergency medicine at the Johns Hopkins University.

It is a hustle dame across the Midwest and particularly the northern Midwest. It is Cargill, and it is an exceptionally well timed conversation as David Rubinstein looks at the leadership capabilities of this absolutely giant private company. Maybe it's a name you don't know, it's an important name, Cargill. Here is Mr Ruben science conversation with David McLennan. John Tyson, who's ahead of Tyson Foods, a competitor reviewers, I assume in certain areas, said that the food chain was maybe

breaking down in this country. We're gonna have to close facilities. Um, do you agree with that, and are you worried that the food chain is breaking down? I think I would characterize it that the food supply chain is understrain. But there's a lot of supply chains that are understrained due to what's happening. And certainly there have been food production facilities in various parts of the country that have had to close because of illness or because of supplied a struction.

But I think basically the ability of us to produce food is still there, and there are going to be momentary closings momentaries in the right word. But we had a facility of be facility that was closed for seventeen days, but it's now back up and running and has been for the last week. So I think the food industry and the food supply chain is resilient. I think the people that work in it every day are resilient. So I think it's understrained, but I don't think it's it's broken.

David mcclennan in conversation with David Rubinstein, and of course this is so important and part of leadership Live with David Rubinstein. Mr Rubenstein joins us this morning. David, you and Carlyle are intimately familiar with the peculiarities of how we make food in America. As you speak to David and as you as you work within all of your context, how at risk is our food supply right now? Well? Um, John Tyson a statement and issue and put a newspaper

add out effect saying the food chain was breaking. Uh. In response to that, President Trump issued an executive order yesterday and effect using the Defense Production Act to say that food plants have to stay in business and have to keep producing food. Um, and he's going to provide equipment and other things to make sure their workers are safe. That's the issue that John Tyson was talking about. Many

of the plants because people work so closely together. Employees have come down with COVID nineteen and they have had to close down, and therefore that's been a problem and getting food produced together. Problem is this that or so of the food that we produce is now really produced for restaurants or other kinds of things that are not at home. But now um, those restaurants are closed down, so that kind of food supply is not really available for those people, and so they have to re re

uh position that kind of food. It takes time to do it. In other words, if you prepare food for for let's say McDonald's, and McDonald's isn't open, you can't all of a sudden take that food and and and put it in different kind of containers and send it a supermarket. And that's been a challenge as well. Historically, people eat about five to seven meals outside of their home a day a week, five or seven meals a week outside their home. Now it's down to maybe one.

And so that food chains is different because of different kind of people providing different parts of the food chain. Unfortunately, we also have a problem that a lot of people can't afford food right now, and you see enormous amounts of food banks and going on in the United States. So, David, as you sat down with Mr mcclennan from Cargo, what were some of the key challenges they're trying to negotiate

right now in the world of a pandemic. The key thing is making certain your employees are safe um in meat packing plants or other kinds of things where you're involved with an effects, slaughtering animals or things related to that. You have a lot of people closely working to each other and Historically they haven't had the kind of protections we now have, and getting the equipment for that has not been easy. Now they're getting that kind of equipment,

it takes a while. So a lot of these plants have had people that have been um affected by COVID nineteen. Now they're going to come back, hopefully with better equipment so forth than and better safety. David, one final question if we would, and I must ask you about how you perceive American business and the animal spirit on this day of negative four eight percent g d P. What do you observe from all your contacts of how the

American corporation fares. American corporate leaders have really been working around the clock to keep their businesses afloat in some cases and rereposition them. So, yes, the economy is down, and I suspect they'll be down for a little bit longer, but I do think it will will come back, because you know, we have some really good companies and we have good CEOs. But there's no doubt that's been a body blow for for at least a quarter or so,

maybe maybe two quarters. David Reubinstein, thank you so much. Can't say enough about the time and this this PM on Friday, and of course this will be played across all of our digital operations as well. Mr Rubenstein was Mr mcclennan of car Carlyle on his leadership at series. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before

the podcast. You can always catch us worldwide. I'm Bloomberg Radio