–‘This is Obviously a Complex and Rapidly Evolving Situation’
By Denny Gulino
WASHINGTON (MaceNews) – The vice chair of the Federal Reserve Board, answering questions at the NABE’s economic policy conference Tuesday, stoutly resisted efforts to draw him out on the corona virus or the 2,000 point drop in the Dow industrials over two days.
Richard Clarida, if anything, amplified the caution of other Fed speakers this week in saying anything beyond the central bank is prepared to “respond accordingly” should conditions “trigger a material reassessment.”
There were no broad assurances that the Federal Reserve stands ready to do whatever it takes to maintain orderly conditions whatever the future holds, a posture that Fed officials would hope is already well understood and even now, apparently does not bear repeating.
As Clarida answered questions of NABE moderator Ellen Zentner, the chief U.S. economist at Morgan Stanley, or more accurately deftly maneuvered past any specifics with broad academic answers, the Dow industrials bounced through the minus 950 point mark to stage a mild rebound aiming for the close, down 879.44 or 3.12% at 27081.86, shortly after he finished.
The benchmark 10-year Treasury note yield had climbed back above its earlier low to 1.344% by late afternoon, having dropped to a record 1.311% shortly after 2 pm. ET. The 30-year yield had gone to 1.786% about the same time, then moved back up to 1.816%.
With the market administering such large rate cuts in such a short time – the 10-year had been at 1.920% at the end of last year – there was perhaps little Clarida could add for an audience of economists in the way of any rate-cutting solace on the Fed’s part, and he didn’t.
“This is obviously a complex and rapidly evolving situation,” Clarida said to the opening question on the corona virus. “First, of course, let’s remember this is a human tragedy for those afflicted. We don’t want to lose sight of that.”
He continued, “And it does seem likely, certainly compared to when we spoke a couple weeks ago, it does seem likely that there will be a noticeable impact on Chinese economic activity certainly in the first quarter of this year, although importantly we probably won’t get that Chinese data until probably April.”
Echoing Cleveland Fed President Loretta Mester to the same group Monday, Clarida maintained it is “just too soon” to assess how the virus “does impact global activity and the extent to which you might impact the U.S. economic activity and whether or not that would be material and persistent.”
Finally, he wrapped up his virus comments saying, “We’re really going to be looking at all the data on this.” The Federal Open Market Committee, which has its next policy meeting in three weeks, ”will be forming the judgments that we need to form and obviously we take monetary policy on a meeting by meeting basis as I said, but beyond that I really wouldn’t want to go any further.”
Earlier, in his brief prepared remarks, he had said, “Of course, if developments emerge that, in the future, trigger a material reassessment of our outlook, we will respond accordingly.”
Can the U.S. remain, in these conditions and in ex-Fed Chairman Alan Greenspan’s words, an “oasis of prosperity?” he was asked, to which he answered in the same broad terms he employed for almost all his responses.
“Certainly, as I’ve made clear previously at NABE events and other forums, the U.S. is part of the global economy and what happens globally impacts us in a variety of channels.”
He repeated, “It is really too soon to tell and we’re processing the information as it comes in and again, our mandate is the U.S. outlook and maximum employment and price stability, but of course we will take global considerations into account as we need to.”
On the plummeting stock markets, Morgan’s Zentner attempted to elicit some comment specific to the turmoil of the past two days by noting Monday’s Dow was down a thousand points.
The Fed, he said, looks at “a very broad range of indicators on financial data. But more broadly on the economy let me talk generally about financial conditions.”
There are, he continued, “a number of financial conditions indexes available and I look at many of them depending on how they’re constructed though, many of them do tend to be very correlated with movements in equities and movements in the VIX and that’s fine. The VIX is one variable to look at but the financial conditions are much broader than that.”
Clarida skirted the fact of 3% and more daily drops in stocks by saying he goes beyond equity indices. “I think you have to look at credit availability, you have to look at confidence frankly after looking at credit spreads, you have to look at the level of borrowing costs and so to my mind, I’ve actually not found any one single financial conditions index that captures all of that.”
There was one specific Zentner pursued that Clarida evidently did not appreciate.
“Many in the room may not be aware that there is a matrix that you all look at the meetings,” she said. “We don’t get it except with a five-year lag when the transcripts are released but it’s a matrix that’s sort of helps you think about the sort of reaction functions around the various inputs to your forecast.”
She pressed on, “You know would there be, could there be, has there been a push to make that more readily available” as an additional bit of transparency?
His response was fairly curt. “I’ll just leave it at the SEP (quarterly Summary of Economic Projections) is something that is part of our framework review and is receiving active attention and assessment and as we roll out the review.”
Clarida’s other responses were mostly composed of standard restatements on inflation targeting, the healthy U.S. banking system and efforts to ensure macroprudential stability the audience had no doubt heard many times before. The vice chairman took no additional questions from reporters.
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Contact this reporter: denny@macenews.com