MNI INTERVIEW: Treasury Needed Over Fed To Avoid Big Recession

By Greg Quinn

     (MNI) - The U.S. Treasury Department has more powerful tools than the Fed

to keep credit markets working and should use them quickly to avoid a "hard

landing" recession, Campbell Harvey, a former Fed visiting scholar, told MNI.

     The government's main job is to sustain liquidity and Treasury is not

constrained by rules barring the Fed from buying many types of assets, said

Harvey, a Duke University professor credited with identifying the relationship

between the U.S. yield curve and recessions.

     "I suspect that we will see some support from them in terms of kind of

avoiding a further drawdown," he said of Treasury policy in an interview on

Monday from California. Potential moves could include delaying deadlines for

federal taxes, as well as canceling tariffs on China and seeking the same from

the world's second-largest economy, he said.

     Hopes for a "soft landing recession" last year given the shallow inversion

of the yield curve have been replaced by a more severe outlook because of the

global shock posed by COVID-19, Harvey said. The view that Fed rate cuts can fix

the problems of slower growth and lower liquidity is naive, he said.

     --SHORT-TERM FUNDING

     "These short-term funding needs must be front and center" for the

government, he said. "The key thing is whether we can avoid a hard landing. A

hard landing means that many firms go bankrupt and there is a spike in

unemployment."

     The Fed has much less room to cut rates than it did back around the 2008

financial crisis, and the world economy no longer has the support it did from

fast-growing emerging markets like China, he said. "It is much different, and

potentially more serious" than 2008, he said.

     Record low Treasury bond yields and plunges in global stocks signal

investors foresee a major recession. Global oil prices also plummeted Monday

after major producers failed to agree on production limits.

     Lower energy prices are a mixed bag for a U.S. economy that consumes a lot

of oil but is now a bigger producer instead of a pure importer, he said.

     "It might be a positive on the consumer side, it's a definite negative on

the other side," for industry, Harvey said.

     While last week's Fed rate cut may be less important, the speed of action

is vital and more of a factor than coordination, he said. Last week the G7 said

major countries were working together without taking direct action, and the Fed

cut 50bps a few hours later.

     "A lot of this stuff, speed is important, and China and the U.S., a lot of

stuff they can just do on their own, they don't need to coordinate with the G7,"

Harvey said. "This is the time to take leadership."

     "People focus too much on the Fed, and don't focus enough on the Treasury,"

he said. "I suspect that they are going to be active, and they have got very

broad responsibility, and they can do things that the Fed can't do."

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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