By Steven K. Beckner
DURHAM, N.C. (MaceNews) – Richmond Federal Reserve Bank President Tom Barkin was reluctant Wednesday evening to conclude that the coronavirus will have a dire impact on the U.S. economy, but suggested the Fed should not be too hasty to ease credit even if the disease does turn out to have a bigger effect than now hoped.
Barkin, talking to reporters following an appearance at Duke University, said his preference would be to see how the economy performs in face of the coronavirus for a while, given that the Fed is close to meeting its “dual mandate” on employment and inflation and given that the Fed made three “insurance” interest rate cuts last year.
“There is always the potential this thing gets worse …,” he said. “If it’s a pandemic situation, that’s a mega-risk, but we don’t have any information we’re going there.”
Barkin, who succeeded Jeffrey Lacker as Richmond Fed chief in January 2018 and will return to the voting ranks of the Fed’s Policy-making Federal Open Market Committee next year, observed that companies reliant on exports to China or travel to China will be hardest hit, but other companies with supply chains linked to China will also be hurt. How badly will depend on how much inventory they had built up before production was shut down in regions affected by the virus, whether they have alternate sources of supplies, and other factors.
He said many companies had already built up a “buffer” of parts and the like before the virus hit in anticipation of Chinese New Year holidays, but said that once those inventories run out, there could be larger impacts on U.S. firms reliant on imported Chinese goods.
So the U.S. economic impact will depend, among other things, on “how soon production gets back on line,” on “how much inventory you keep and how dependent your supply chain is on China,” and on whether there are other channels of supply and shipping.
Barkin said his “read” is that the economic impact will be limited “if everything gets up to speed in next few weeks.” If not, the impact could be more significant.”
Asked how aggressively the Fed should respond in the latter scenario, Barkin responded with caution: “We’re still in an economy that’s growing at about trend,” with unemployment apt to stay “about where we are now” and with “inflation starting to firm.”
“In that environment,…especially with the insurance cuts we did last year, I would like to see those cuts take full effect” before cutting rates further, he added.
Regarding the recent flattening of the yield curve, Barkin blamed safe-haven flows into dollar assets and said, “I’m not at this point taking much signal from the yield curve.”
Barkin sounded less concerned than some of his colleagues about the fact that inflation, as measured by the PCE (price index for personal consumption expenditures), is running below Dallas Fed’s trimmed mean index does, Barkin said, inflation is “about two” percent, but he suggested that, for policy purposes, the Fed is stuck with the target for the PCE which it adopted more than eight years ago. He noted that inflation, as measured by the consumer price index averages 40 basis points higher than PCE inflation.
Barkin said he is “one who thinks we’re doing pretty well on stable prices,” but said, “when we make a public commitment” to a PCE target it has to do its best to meet it or risk an erosion of inflation expectations.
“We did declare a goal, and we have to acknowledge our persistent undershoot,” he said, adding that he likes Canada’s approach of using multiple inflation indices to measure progress toward its inflation target.
Barkin made the comments after participating in a panel discussion at Duke University’s Center for International and Global Studies, which included former Fed Governor Sarah Bloom Raskin and former European Central Bank statistics chief Aurel Schubert.
In earlier remarks to his Duke audience, Barkin said the economy is more vulnerable to some “shock” than to a gradual slide into recession, and he listed the coronavirus as one potential shock, another being cyber threats. “There’s a lot that could happen on the shock front,” he said.
So far, Barkin said monetary policy “has worked pretty well” in meeting its maximum employment and price stability goals, but pointed to three concerns beyond such potential shocks:
1. low short-term interest rates give the Fed “less room” to counter a downturn than in the past — 160 basis points versus at least 400 basis points.
What’s more, he said, “the yield curve is pretty flat … so unconventional policies that try to put pressure on long-term rates may have less impact when long-term rates are already low.”
2. Below-target Inflation has been “pretty unresponsive” and “runs the risk that inflation expectations become anchored below our (2%) target.”
3. Financial markets “seem overly focused on the Federal Reserve as the only game in town.”
Barkin said the Fed needs to consider new policy approaches to deal with these issues, but he eschewed negative interest rates, saying they “have little appeal to me.” He said that would “run the risk of being seen as policy desperation” and could damage the financial system.
A better approach, he suggested, would be to try to hold down long-term yields as “one more tool” the Fed could use if needed.
Barkin, drawing on the year-long series of FedListens events, also said the Fed can and should “act faster and more forcefully” than it did in wake of the 2008 financial crisis.
On inflation, Barkin said the Fed has been considering various “make-up” strategies — allowing inflation to run above target for awhile after running below target for so long. Another possibility, he said, would be to shift from a point target to an inflation range. But he said, “timing is a challenge” as to when to implement a new Inflation-targeting regime.
Barkin added that the Fed “needs to send a clear message that monetary policy is only one tool” and should “not create unrealistic expectations.” Fiscal policy must also come into play, he said.
Barkin did not touch on his near term monetary policy preferences.
In two days of testimony last week on the Fed’s semi-annual Monetary Policy Report to Congress, an upbeat Chair Jerome Powell reiterated that the current policy stance is “appropriate” and likely to remain so as long as the economic outlook doesn’t change “materially.”
However, Powell warned, “we are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy.” He said the Fed must assess how extensive and “persistent” the virus’s effects on the U.S. economy will be.
Since then, the number of coronavirus victims has mounted, as has the economic damage in China and elsewhere in Asia. On Monday Apple Inc. announced it would be unable to meet its first quarter revenue projections due to virus-related production shutdowns. Stocks plunged on the news.
Until very recently, many Fed officials were saying the federal funds rate could be held unchanged all year. Now, a few of Powell’s colleagues have talked about possibly needing to cut rates, as it did three times last year to counter trade and other global risks. Since October, the Fed has held the funds rate in a 1.5% to 1.75% target range.
Should the Fed need to go beyond rate cutting, Powell and others have said they would not want to take rates negative, but would instead resort to large-scale asset purchases (“quantitative easing”) and/or “forward guidance.”
The Fed has already done an about-face on balance sheet policy.
After more than tripling its balance sheet through three Q.E. rounds to counter the financial crisis and recession, the Fed began shrinking it in October 2017, by declining to roll over or reinvest an escalating amount of maturing securities. This balance sheet “normalization” process culminated last year. In March, the FOMC slowed the pace of balance sheet shrinkage by lowering the monthly caps for rollovers and reinvestments. It decided to stop asset redemptions and halt the reduction of its securities portfolio at the end of September.
But in September, reserve pressures forced the Fed to do large-scale repos to keep the funds rate and other money market rates from spiking. Then, at a special meeting in October, the FOMC decided to supplement repo operations with outright purchases of shorter-term Treasury securities “at least into the second quarter,” thus re-expanding the balance sheet.
The Fed’s aim in buying $60 billion per month in T-bills is to keep reserves at or above the level reached in early September, a little over $1.5 trillion. In his Jan. 29 press conference, Powell said, “we expect that the bill purchases will durably bring the underlying level of reserves to the ample level sometime in the second quarter of this year.”
If economic and financial contagion effects of the coronavirus worsen, the Fed might elevate its notion of “ample” reserves. But Barkin gave no hint that this will be needed any time soon.