MNI INTERVIEW: Fed Could Hit Zero By June: Ex-Economist Sahm

By Pedro Nicolaci da Costa

     WASHINGTON (MNI) - The Federal Reserve could be forced to cut interest

rates to zero again by June if Congress and the White House don't take decisive

action to bolster an economy facing a big hit from the coronavirus, a former top

Fed economist told MNI.

     "It is entirely possible that we're at zero by June," Claudia Sahm said,

"especially conditional on the administration not having a plan yet and Congress

thinking 10 billion dollars will do anything." Sahm also worked at the White

House Council of Economic Advisers under President Barack Obama.

     Congress has passed what Sahm described as a meager USD8.6 billion spending

package aimed at hospitals and healthcare workers, but there are few signs of

proposals for large fiscal stimulus. The White House has downplayed concerns,

sometimes contradicting medical experts.

     "There is such a huge number of households that are just one paycheck away

from financial distress," said Sahm, now director of macroeconomic policy at the

Center for Equitable Growth in Washington. "They don't know if they're going to

get sick. They don't know if their kids' school will be closed. When you have

that kind of uncertainty and a very thin buffer, you're going to cut back

spending anywhere you can."

     "That's the dynamic where you get a recession," she said. 

     Fed officials aren't forecasting a recession and say the world's largest

economy had strong fundamentals before the virus outbreak that would help extend

one of the longest American expansions on record. The FOMC still voted

unanimously to cut rates by 50bps in a rare intermeeting move this week and is

expected to ease further at its scheduled March 17-18 meeting. 

     "We haven't seen a shock to the economy like this for a very long time,"

said Sahm, who sees another quarter-point cut in rates to a 0.75% to 1% range.

"At this point, anybody that's going to forecast more than two weeks out and

think they're going to know something--this is bold."

     "The most likely forecast would be a quarter point," she said. "If the

stock market doesn't bounce next week ... then we could be looking at a half

point."

     The Fed is up to the task but isn't sure about the fiscal response, said

Sahm, who welcomed comments from St. Louis Fed President James Bullard on

Bloomberg TV Friday saying "everything is on the table."

     Policy makers last cut interest rates to zero in December 2008, in the

depths of the Great Recession, before embarking on several rounds of large-scale

bond purchases.

     This week's rate cut came hours after an emergency G7 call discussed

coordinated action and officials from that group say they are prepared to do

more as the virus has spread from China to places like Italy, Iran and the U.S.

Sahm, who worked at the Fed for over a decade through 2019, argued that while

the U.S. central bank did not issue a joint statement with other central banks,

its cut was effectively part of a coordinated move.

     Avoiding a recession requires a stronger, more targeted response than

appears in the cards. She favors direct spending proposals that counter a likely

prolonged hit to confidence -- including cash transfers to families and

individuals.

     Speaking on a day when markets were swooning further and as credit markets

suffered their worst selloff in a decade, Sahm said no financial authority,

including the Fed, should be shy about addressing the economic damage.

--MNI Washington Bureau; +1 202 371 2121; email: pedro.dacosta.ext@marketnews.com

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