let's start with a big move this week
because two weeks ahead of a scheduled
meeting just a couple of hours after a
g7 announcement from the finance
ministers and central bankers we're
going to do what's appropriate Fed comes
barreling out of the gate emergency
meeting 50 basis point cut hasn't
happened since 2008 why the urgency
what's shifted I think the you know Jay
Paul did a great job in his press
conference and hallucinating the details
around this but you know risks obviously
are rising that this coronavirus could
be more severe than what we were
previously thinking I think the
sentiment for me anyway was that we were
probably going to have to move at the
March meeting anyway might as well move
that up and do it sooner so that I think
that was the basic thinking here I also
think that we got the policy rate to the
right place for now given the
information that we have now and we took
out some insurance against the
possibility that this will cause a
growth slowdown in the US well you know
that's interesting you say it's at the
right level for now because Donald Trump
president Trump isn't the only person
who's calling for more rate cuts a lot
of traders they've all street economists
are saying the Fed will move again 50
basis points at the March meeting is
that doesn't sound like something you're
on board with yeah I don't think I don't
think you should prejudge that meeting
at this point we've already just had a
meeting we move the policy rate where we
thought it should be given the
information we have today obviously it's
a very fluid situation and we're keeping
track of things but you know you've hung
around monetary policy for a long time
it's unlikely we're going to have that
much different of information when we
get to the get to the March meeting you
know depending on how you view how
rapidly this is this is going to move we
certainly can keep our options open
there but since we kind of pulled that
that decision forward I'm not sure you
should put a lot of weight on the March
meeting right now anyway we can meet
inter meeting anyway
which we've just shown that we can do so
so I just wouldn't want to put you know
a tremendous amount of focus on this on
this March meeting there won't be a lot
of new information there that we don't
have today except except how the virus
is progressing day to day that kind of
information will be you know will have a
little bit more on that
so that is something that the Federal
Reserve is now tracking very closely I
mean that's what we started doing wasn't
everybody yeah globally yeah yeah
well was on the FOMC was there it was
this pretty much unanimous ly supported
was this in any sense a close call as
participants got on the phone and talked
about it and and voice their opinions
and set their votes you're not a voter
but nevertheless everybody has a say in
this yeah I can't talk about the meaning
itself but the vote was unanimous and I
think I think it's pretty clear that the
baseline of the US economy is still
quite good best labor markets we've had
in 50 years and all the rest that's
associated with that great consumption
everything's looking good but the
downside risks have increased here and
so we want to take that on board and get
some insurance to make sure we keep the
expansion going as we deal with this
temporary virus it will be temporary
well eventually we'll get through this
but the question is how severe is it
going to be at how long is it going to
last because of the fact that the
meeting was so close and you only have
so much information I think a lot of
people have concluded that this rate cut
was really focused on confidence I guess
that's my was it confidence was it the
stock market wanting to create help
stand up and say we're here to create
some stability and not see the market
continue to take and of course as you
know the first reaction to the move was
a big sell-off in stocks you know the
reaction that was the reaction but ahead
in the meeting there was actually a
rally based on the fact that the g7
ministers were going to we're gonna meet
and I think this was kind of buying the
rumor sell on the news kind of situation
so I'm not quite sure you can just read
it straight away
as far as
when the Fed moved here you know a lot
of people would say well it probably
doesn't matter that much if you do if
you make the rate cut ten days ahead or
ten days later and I think that's true
from a macroeconomic perspective but at
least my thinking was why don't we just
go ahead now if we if we think we're
going to do it in March we might as well
just go ahead now and and position
monetary policy appropriately for the
current situation did the stock market
in there to it at all and that makes up
because we've seen some pretty we've had
quite a downdraft
from the highs I know the stock market
is still maintaining some gains from the
beginning of the rally nevertheless
investors yeah I mean I think you and I
have talked about this over the years
but the the stock market is trying to
look ahead and see what the growth
prospects are for the US economy the Fed
is trying to do the same thing look
ahead see what the see what the
prospects are for the economy the stock
market trades minute by minute we only
meet every so often so sometimes it
looks like one is reacting to the other
but I don't really think that that's
true I think both are trying to forecast
the future and I think that's what was
that was going what was going on here
can you walk us through Jim how a rate
cut is supposed to help deal with a
virus this is not like looking at
employment reports and retail sales so
is there a mechanism would it be through
higher stock prices because the Fed move
does create confidence a lower US dollar
lower rates for home and auto loans are
they going to work if people are so
freaked out about the virus they can't
think about anything else and don't go
out and shop and don't make the big
decisions like that
what's the mechanism for interest rates
and the virus yeah I mean we we know and
and chair Paul said during the press
conference you know that this isn't
going to fix you know medical issues I
do think we will get an outstanding
public health response in the US and my
thinking on that is that that response
is occurring at the federal level the
state level the local level and even on
the individual level and so you've got
many reactions to this
coronavirus that on net I think will be
very positive in helping to protect us
against this virus as best as we can be
protected so I'm I think will do very
well I think we have a very good health
system in the u.s. one of the best in
the world and and we'll be able to
handle this as well as it can be handled
so I'm I'm I I think what will happen
going forward is we'll get news about
you know there's an outbreak here or
there I think we'll get many more cases
in the days ahead but I think generally
speaking I'm optimistic that we can make
a good response here on the health side
for that for interest rates I think we
just had to take on the idea that
there's risk to growth to the downside
and that would naturally lower the rate
of the natural rate of interest and we
have to take that on board when we're
making monetary policy so have you cut
your growth forecast at this point so a
lot of private forecasters have you know
we're in though we're in the middle of
working on that so what do you think I
should do I think my base case is still
that will will do quite well in the US
economy for this year I think the
fundamentals are good and I think the
base case is that we can bring this
virus under control I understand that
there's downside risk to that and that's
why I'm willing to adjust policy and I
think all options are on the table as
far as that goes but but for this year
you know oacd came out with growth
forecasts I think they only mark the
u.s. down one tenth that was a group
that was trying to get the whole global
impact and model the whole thing and put
it all together and they came up with
only one-tenth on US growth as a base
case they also understand that there's
downside risk but but I think that's
probably the best way to think about it
right now
first quarter tracking growth HHS market
still at 2.1 percent so I'm not quite
sure we're gonna see as big an effect in
the first quarter is maybe what people
were previously thinking
so I think a lot depends on how the
virus evolves here in and so we're gonna
have to play this very carefully going
forward but for right now sitting here
right today I'm still sticking to a
pretty good base forecast for the US
economy what about this criticism or
fear concern that the Federal Reserve is
using valuable interest rate cut ammo at
a time when it may not be very effective
if the virus gets worse than people to
go out and shop interest rate cuts can't
change that and in fact if we look at
China what do they do to slow the virus
they took steps that slowly economy they
closed factories they told people to
stay home if it gets bad in the US won't
that happen too why be cutting rates at
a time when the cure for the virus is in
effect to slow the economy make people
stay down homes slow you know make me
make sure that these these activities
that connect us are not occurring and
then you're just doing your regular I
know a lot of people are saying this but
they're forgetting that there are longer
run strategic decisions that might be
made based on lower rates you might
stimulate some investment that wouldn't
otherwise be made on the margin
households might decide to make a
purchase that they wouldn't otherwise
make from their home computers or
something like that so I really am not
sure that you can just make this clean
dichotomy and say there aren't any
effects people often say that about
monetary policy it rarely turns out to
be true so what about the bond market
Jim I mean did you ever think you'd see
a ten-year note below 1% stocks have
rebounded a bit today but the tenure is
still at you know 0.9 and some and
change what's the signal here what is
that telling us well I think markets
have become worried about this morphing
into a global pandemic and there's a lot
of flight to safety coming to the US so
that's I think a line share of what's
going on here and sitting here today
we're not quite sure how this is going
to transpire in the US and Europe in
particular and so we're gonna have to
wait and see how the how the virus
progresses going forward
I think you know it's amateur hour for
me as as far as the medical part but I
do think a lot of the cases turn out to
be more mild that has happened in China
and it might happen appears to be
happening in the US as far as what I can
tell but we'll just watch this very
closely and and encourage our public
health officials to make a great
response here are you worried about
negative bond yields in the United
States do you welcome them and and and
in fact that leads to part to that
question maybe is the important part
if bond yields are so low and if we're
gonna get negative bond yields people
are saying particularly at this short
end
why does if I need to cut rates yeah so
the market did our work for us already
because that most of the yield curve is
very low anyway so I think we're like I
said I think we're moving the policy
rate to an appropriate level given the
downside risk that's out there even
though the baseline forecast is is still
for pretty good growth in the US
inflation doesn't seem like anybody's
front burner worry right now does it
especially with virus and this whole
question of where we're going next on
rates but does it have an implication
for inflation because we know this has
been a big deal for the Fed and
particularly for chair Powell
let's get fishing up to target he really
wanted to do it in 2020 is this going to
make it a lot tougher if not impossible
for some reason yeah well for those that
want to interpret this as a pure supply
shock they've got some explaining to do
unless they they are also willing to say
that inflation is going to go up because
that's what a supply shock as
conventionally defined would be doing it
would be sending inflation higher that
would actually be a welcome development
from the point of view of the committee
because we have been trying to get
inflation up toward target so I think if
if we got that kind of development I'm
not really expecting that but let's
suppose we got some some bottlenecks and
some pricing that drove was enough to
drive inflation somewhat higher
I think we'd welcome that and accept
that as part of the part of the shock at
a time when the Fed wants to provide
more stimulus and maybe you don't want
to rely so heavily on
eight cuts you know there's there's been
forecasts from Fed officials that the
liquidity provided through repo
operations is going to be gradually
tapering in the first half of the year
would this be a time to go in the
opposite direction and to be more
generous and make sure there's lots of
liquidity take some of the pressure off
rate cuts and and use a mechanism that
is there waiting to be used
yeah that's more of a technical decision
on operational aspects of monetary
policy that's run by that New York desk
but we're trying for that we're trying
to get through this April timeframe
where we could have tax tax returns
coming in and so on and that's often a
time when there's volatility and short
term funding markets so we're going to
make sure we have I think that nailed
down and taken care of and then once we
get past that we can review that that
policy but I think it is interesting to
think that you know we could we could
look at that and do something there if
we wanted to like I say I think
everything's on the table here I don't
think there's any reluctance to you know
to use various tools to our advantage
you know you've worn in the past about a
sort of japan-style deflation Airy
downward spiral do you see any is that
again sort of the they were asking that
question the result of fear of the virus
and how bad this could get or is this
something that you could see combining
with other factors in the world that
we're already in play actually a sliding
in that direction I think there is some
risk of that but I think one of the
things we're trying to do here stay out
of that situation move aggressively now
keep the expansion going keep growth on
an even keel keep labor markets
performing well and get inflation up to
target or above target let it go above
target for a while those are the kinds
of things that we're trying to do here
to make sure that we've got the ability
to run monetary stabilization policy
well into the future here when you look
at China's latest numbers of course we
have the dreadful PMI but we know that
was partly engineered by the Chinese
government but car sales were down
something
like 80% they were already weak in China
how does their economy look to you now
are they at a point where you think the
worst is over or do you think China
could sink further second largest
economy has a lot of implication for
other Asian nations for commodities so
many things those numbers I think were
no surprise you had major fraction of
the Chinese economy essentially shut
down so you would expect those kinds of
numbers to be very bad in that
particular juncture but I'm thinking is
that they'll get past the virus and it
does look like they're bringing it under
control and then factories start to ramp
up again some of the production is made
up maybe a lot of it and and so you
could have bounced back later
you know before we got going on this
previously that was Wall Street story
then they then I think Wall Street got a
lot more pessimistic and maybe
policymakers too and we got news from
around the world about the spread of the
virus but it's worth remembering that
that was the original story and that is
what has happened with other viruses in
the past they do peter out factory start
up again production starts up again you
make up for a lot of the past production
so you know we'll see how this develops
we're going to keep a close eye on it
but that's a narrative worth remembering
I would say and as you can as you
emphasize as everyone does the fact that
we we know this in some sense will be
maybe a long temporary we don't know how
long it's going to take to get through
this or how bad is going to get but we
have confidence in faith that solutions
will be found we will get through this
could this you know in a way be a much
worse version of the 1987 stock market
crash the Fed Greenspan Fed saw the
stock market go down so swiftly and so
much cut rates twice wasn't long before
they were raising rates again in other
words realize oh the economy survived we
didn't need those rate cuts we can take
them back I know it's probably really
too early to think about that seriously
but it could it over the longer term
proved to be like that
yeah the 87 situation was a beautiful
example of a major move
and equity pricing that didn't result in
a downturn and maybe partly because of
the the feds response at the time but
also keep in mind it was much more
severe if I recall correctly you're
talking about 22 percent on the day yeah
22 percent I'm sorry yeah so I think you
know we're not in that situation but
that's an example of a dramatic
repricing that actually did not result
in anything bad happening for the
economy near-term so I think you know
another thing to keep in mind here on
equity pricing is obviously there's a
big run-up from about October first or
so of last year up until maybe mid
February so it had gone up a lot a lot
of commentary on Wall Street and on
Bloomberg has been that well maybe this
was coronaviruses kind of a catalyst for
you know people thinking profits on that
on that big run-up anyway so you know I
don't know it's always hard to measure
and in markets exactly what's going on
but that's a factor as well you always
have to remember that we in in this
situation we started from a peak and
quite a peak it was so as we look at
some of the other factors here Jim I
wonder it just seems like conventional
monetary policy is maybe just is it sort
of off the table I mean what are you
going to look at now so the white or but
you're looking at virus and you're
watching virus data this is so different
from watching the economy and I wonder
can you is it is it must be a difficult
kind of leap for central bankers who are
steeped in that as you said to suddenly
watch this data and know well gosh maybe
we should consider another cut in March
or maybe we should move in April I mean
is it really going is it going to be the
economy was a drawer
our economics is you get to think about
everything and because everybody's part
of the economy all countries are part of
the global economy
I remember the you probably remember
this to the waking up here and seeing
pictures of the tsunami hitting Japan
and the Fukushima reactor and I remember
thinking to myself well that's that's a
terrible human tragedy but that probably
won't have any macro implications and
then lo and behold I found out in the
you know subsequent weeks then oh this
was going to disrupt supply chains and
it was gonna affect the economy and we
had to take that take that into account
so now that's an example of a natural
disaster which you which is affects the
economy so you have to take that into
account a little bit okay well speaking
of Japan it just really quickly here how
does Japan's economy look to you right
now
well they had a down quarter in the
fourth quarter they had the big tax
increase and obviously they're close to
China they're gonna have more impact
from China so we'll see how this plays
out but again I think to the extent
China's recovering and they have a good
public health response in in Japan I
don't see any reason why they can't do
better in the second quarter in the
third quarter of this year yeah well at
least the internet now the Olympic
International Committee said today
apparently that they're not yet
considering postponing the Olympics so
maybe that's another so yeah I think
they'll want to keep a close eye on that
depending on how the virus develops
around the world but they wouldn't want
to have a major event like that if they
didn't feel confident that that it would
be healthy so Jim you know there's a lot
of talk in the US and around the world
about fiscal action now this is
necessary it seems obvious to people but
is this something that central banks can
rely on is there any sense of if fiscal
action is undertaken what would be most
helpful right now yeah when people refer
to this I think they're too broad
there are many many things get get
lumped under the the rubric of fiscal
action so it's not always clear what
people really mean and it would be a
different situation for different
countries as far as what they could do
and how fast they can move you're
talking about a situation that is
extremely fluid here and you're probably
talking weeks and months here a lot of
political processes are very cumbersome
and very slow and by the time you
implement something you're past the
shock so I think those are some of the
considerations around lumping everything
into fiscal action I think the number
one thing we can do here is have an
outstanding public health response in
all countries but you know we're most
concerned here about the US and as I
said before I think that public health
response isn't always as visible as we'd
like it to be because it's there's many
different layers there's a federal layer
and a state level layer and a local
layer and an individual layer and I
think because we've been able to
communicate we've got some knowledge
about the virus from China and how it
behaves and that's enabling us to
respond appropriately and hopefully
bring this under control rapidly well
something that we're more familiar with
that's the job support mm-hmm how big
jobs are coming out this Friday do you
expect to see I mean presumably it's way
too early to see any implications of the
corona virus on US jobs or is it I'm not
expecting any and the commentary doesn't
seem to be expecting any ADP came out
today I guess with a surprise to the
upside it's a very good labor market so
you know I'd expect a good number
sometimes February has some seasonal
effects that's my vague recollection
over the years so we might see a little
bit of that but I think at the time this
was taken that labor markets are
probably doing pretty well
early this conversation you said that
you're you know you the policy is
appropriate now with 50
is point rate cut you got that done and
now you're gonna watch the economy so
does that mean when it comes to the
economy it's the same kind of economy
watch you're going to watch jobs you're
going to watch retail sales are you
gonna pay more attention to things like
although you I know you guys talk to
business people all the time but but the
corporations are saying about how this
is going to affect their sales affect
their outlook as well I think it's a
great time to have the big web of
contacts that the Fed has in the US and
around the world about what the effects
of this virus are going to be on
economic outcomes we understand it's a
human tragedy and I think we always have
to keep that in mind
when we're in financial markets though
we're talking about the financial market
effects and you know I think you get
great pieces of information about some
industries you know really hit hard
some don't see much affect others might
even do better depending on where they
are and I think to be able to absorb
that and piece that together that's
that's where we are right now
what would tell you what indicator what
what set of data what development again
stock market development bond market
development macro data is going to say
to the Fed you know we thought we had
policy right we thought it was
appropriate but let's say the virus is
worsening and then chances are look at
at least somewhat worse from here as we
see more and more cases appearing what
will tell you policy is no longer
appropriate yeah I think my baseline is
that I am expecting a lot more cases to
be uncovered here in the US we're doing
a lot more testing there's a lot more
awareness about it so I expect to see a
lot of reports of new cases have been
identified I think it could go either
way you could you know that's kind of a
high expectation and then you could see
even more cases than the high
expectation or you could see fewer cases
so I we just don't know at this point
that's what we're trying to be flexible
we're trying to take a day by day and
see how this comes in and see how good
the public health response is in the US
are there any when we talk about markets
and financial stability are there any
banking financial stability issues bank
lending issues that are there front and
center for you when you when you look at
this this new big force in it's
affecting the economy
we certainly alert to this and paid a
lot of attention to it I don't know I'm
not really seeing a lot of that right
now but we do have good radar on this
and we'll be keeping a close eye on this
going forward I'm not really expecting
that but you never know so you've got to
be very aware of everything that's going
on and repercussions that maybe you
didn't think about but I'm not seeing
anything so far okay what just seems
like it's a sort of a it's a new chapter
in monetary policy and central banking
isn't it something we haven't seen
before
viruses yes you've got Ebola well that's
true
Mich one another I guess I'm - eight
seven oh no okay so there are cases
before we have looked at those cases
they did fade away this one maybe is
going on longer Jim I want to thank you
for taking time on a special day here at
the st. Louis Fed it's the Homer Jones
Memorial Lecture it's an event you hold
every year this year honoring John
Cochran he's a senior fellow at the
Hoover Institution at Stanford
University and and I want to bring this
up first of all to highlight and that's
why I'm here because I come out every
year for Homer Jones but also this sense
of where monetary policy is and where
it's going just just in a nutshell
who was Homer Jones and why was he so
important not only to the Federal
Reserve Bank of st. Louis but but to the
the Federal Reserve System in general he
started here what in 1958 yes he did he
was home or I'm sorry he was Milton
Friedman's teacher when milton was an
undergrad and he encouraged mountain to
go to a graduate school and they were
fast friends through their whole careers
and late much later Milton Friedman was
at Chicago and
Homer Jones came here as a research
director but the main thing about Homer
Jones is that he was the first research
director to have the bank do academic
style research at that time a lot of
monitor space stuff and and then that
model was copied all across the Federal
Reserve System and in fact all across
central banks worldwide so he was kind
of the leader in that kind of analysis
which is so important for central
banking today before was about he just
data collection and things like that by
Federal Reserve
he loves ADA that's for sure and but
then they got into statistical analysis
econometric analysis and then they kind
of took off from there
theories all kinds of things so it it
certainly mushroomed and then spread
across all central banks well what do
you think Homer Jones would make of
where the Federal Reserve is now or what
and I guess the same question to you I
mean a lot of people feel that the Fed
has taken on too much the Fed does not
want to this is how this is I mean we
some of the common criticisms or ideas
the Fed Reserve can't let stock markets
correct Federal Reserve can't let
recessions happen some people would
argue recessions are necessary in the
economies they happen they wash out
excesses and in fact that what we're
seeing now to a certain extent is
keeping emergency policies in place for
too long
ultra low interest rates and bond
purchases yeah what do you make of that
that criticism that thought you know one
thing is that Homer Jones was a
professor during the 1930s and and
Friedman was a student during the during
the 30s and they would say I think that
zero interest rates are a sign of tight
monetary policy not a sign of easy
monetary policy and they would emphasize
quantity measures of money and there's a
whole long literature about that
you know stemming from that but their
experience coming out of the 30s was
that monetary response had to be thought
of in some other way than just interest
rates
and that was dominated the debate for
decades after that but what about you is
the Fed taking on too much is the Fed
not letting some some natural forces
work that might be a little bit
difficult but they're part of business
cycles they're part of economic life
cycles what our job is to help mitigate
business cycles not eradicate business
cycles so the there are ups and downs in
the economy if you run a good monetary
policy you you sort of smooth that out
over time you get less lower highs and
higher lows I guess is what you'd say
and that's a good outcome for the
economy and but but still things are
happening changes happening innovations
happening disruptions happening all
those things are natural to the economy
and you do want to let those things
occur and let the transactions occur
through markets but you want to try to
smooth it out as best you can
another question little more practical
when it comes to the viruses you know
running a Federal Reserve Bank is not
just going to the policy meetings that's
very important say just I mean yes but
you manage lots of people you there
there's a whole side of it that is
administrative and at a time like this
but here at the st. Louis Fed are you
two starting to look at Wow
contingency plans what are we going to
do of this what are we going to do if
that yeah we're very serious and very
focused on this we've had quite a long
management committee meeting I guess the
day before yesterday
on this and we're very much in tune with
tracking the virus day to day and
thinking about the appropriate policy
response at the bank level and handling
up special situations that might come up
and answer of a very aware attitude
among the management team about what's
going on and we don't want to be asleep
as as this develops I wonder if we
should expect some kind of system wide
like a Federal Reserve sort of policy on
how to deal with the workplace how to
deal with working at home and all those
kinds of things yeah I think one size
fits all often doesn't work
while you've got different parts of the
Fed in different cities they've got
different challenges in different places
so I think you do want to coordinate but
you also want to tailor the decisions
for the particular area that that you're
in and and the threat level and the
risks that you're taking in that
particular area
and a lot of the banks you know are
specially business-wise the banks are
specialized in certain areas and so
different banks have different
businesses that they they are handling
and running for the Federal Reserve and
so those have different requirements
about from a management perspective but
that I just I would appreciate
corporates that are going through this
and other entities that are going
through this I mean you really have to
be on your toes and you have to manage
very carefully because there are a lot
of considerations about exactly how to
handle things and risks are evolving and
and I've talked to business contacts and
they're doing exactly the same thing
they're having meetings they're thinking
about well what about this what about
that what are the trade offs how can we
play this to our best given the
situation