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--Fed May Not Produce Quarterly Forecasts In June
--Fiscal Response "Right-Sized"
--Optimistic Of H2 Rebound, But Drawn-Out Lockdown Could Have Severe
By Pedro Nicolaci da Costa and Jean Yung
WASHINGTON (MNI) - The Federal Reserve may not have enough clarity on the
pandemic-hit economy by its next meeting in June to offer a new set of quarterly
forecasts, St. Louis Fed President James Bullard told MNI in an interview
"A lot of times firms stop giving forward guidance on how they think their
business is going to progress. We already did it in our March meeting, we could
continue that," Bullard said. "Generally speaking you'd like to give guidance if
you think you can give something useful."
The Federal Open Market Committee has not yet made the call on whether to
publish forecasts in June, Bullard indicated. "I'd let Jay Powell make the
decision," he said, referring to the Fed chairman.
Fiscal support from lawmakers has been "right-sized for the situation"
based on market forecasts that output for all of 2020 is likely to be roughly 6%
lower than 2019, Bullard said. "If you think output will be between 5% and 10%
lower, that's about 1 to 2 trillion dollars" and "on the same order of
magnitude" as bills approved by Congress.
In contrast, Powell on Wednesday urged Congress to spend more to prevent
prolonged unemployment and bankruptcies as the debate over another large
stimulus bill stalled.
But Bullard is worried that business shutdowns lasting longer than 90 to
120 days could lead to "worse outcomes" and urged a more "granular approach
tailored to the situation."
"A financial crisis could develop if the shutdown policy goes on for too
long," he said, or worse, a "depression scenario where you have so many business
failures and you get a lower output for a long time."
That's not the case at the moment, he noted. Bullard is hanging onto his
optimistic view that the economy could yet stage a rebound in the second half of
the year as parts of the country reopen.
"Right now I think we're still in good shape, a lot of CEOs say they can
handle this for a quarter," he said. "Banks might even do well through this
crisis" because they are originating government-sponsored loans. "But if a lot
of their credit turns bad, their capital will go down and they'll be in
Bullard said the Fed is paying close attention to the mortgage market,
which some worried could again become a trouble spot -- as during the last
recession -- as consumer finances deteriorate and mortgage servicers run low on
"This is something we want to make sure continues to function during this
period," Bullard said referring to the flow of credit to housing.
Public health experts warn that efforts to reopen the parts of the country
prematurely could lead to a renewed spike in coronavirus cases, and new
shutdowns. But Bullard argues the more we learn about the virus, the more we can
manage the risk.
"The U.S. economy faces lots of mortality risk, including terrorism risk
and auto accident risk. We don't say everyone has to stay in the house because
there are terrorists out there."
Like Powell, Bullard said the Fed is not considering negative interest
rates despite persistent market speculation to the contrary.
"The committee has rejected this as a policy outcome for the U.S.," he
said. "If traders want to bet on it, they can bet on whatever they want."
However, Bullard said he will be pushing for the Fed to consider more
aggressive ways to consistently hit the central bank's official 2% inflation
target. U.S. inflation consistently undershot that goal in the last recovery as
wages remained stagnant for most of the 11-year period.
In particular, Bullard wants the Fed to consider policies like a
price-level target or a nominal GDP target in order to signal to markets and the
public that the central bank is serious about engendering a robust recovery from
the sudden, coronavirus-led downturn.
"This might be a logical time to try to go to something more like
price-level targeting or nominal GDP targeting," he said. "That might be helpful
in this situation because it would indicate that rates would stay low until
you're able to get past the shock and get inflation closer to the price level
"There are things that we can do with forward guidance and we'll probably
look at those in the months and quarters ahead," he said.
--MNI Washington Bureau; +1 202-371-2121; email: email@example.com
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