Part 1: Getting Back to Work & Consuming Again / Fed Actions

Part 2: Why Inflation Should Not Be A Problem

Part 1

Getting Back to Work & Consuming Again

‘This is a crisis where the first chair is held by the public health officials, and the second chair is held by the fiscal authorities. We at the Fed have the freedom to be able to move relatively quickly, but we're the third chair here, trying to help out where we can.’

Malcolm Riddell: ‘Tom, what's top of mind right now?’

Tom Barkin: ‘This is going to be a deep downturn. I'm focused on how fast can we recover, and there are two pieces to it.’

• ‘The simpler piece is how hard is it going to be for us to call people back to work? I'll call that “operational recovery.” We're closing in on the point where it's time to go back to work with the appropriate precautions.’
• ‘The second piece – the one I'm really most focused on - is how long will it take for consumers to come back and shop? What is it going to take to get us back into the stores, into the restaurants, into traveling again, into concerts, into ballgames? I’ll call that the “confidence recovery,” and it’s going to be a lot harder.’

Tom: ‘I'm trying to get some insight from China.’

• ‘I've looked at some ShopperTrak data that would suggest Chinese retail traffic is somewhere around 50 or 60% of what it was before.’
• ‘China is interesting, in part, because they're eight to 10 weeks ahead of where the U.S. is.’
• ‘That's a pretty slow trajectory, and I could imagine the same kind of slow trajectory here.’

Fed Actions

Malcolm Riddell:‘Now let's switch over to the Fed actions, and how you see what's been done so far, and what you have left in your arsenal to deal with this recovery?’

Tom Barkin:‘Well, it was only a month ago that there were a lot of articles written saying we didn't have any ammunition left. That wasn’t right.’

• ‘I think it's striking to see how many things we've been able to move forward, led by Chairman Jay Powell and the Board of Governors.’

‘Just for context, in response to the 2008 financial crisis, we took actions such as lowering rates, forward guidance, and quantitative easing.’

• ‘They were specifically designed for the environment that we were in then.’

‘In the situation we’re in now the banks are healthy, which wasn’t the case back then.’

• ‘The yield curve is flat, not steep.’
• ‘And the markets have again been quite volatile.’

‘So in addition to taking rates down - the traditional tool - we've been heavily engaged in trying to settle down the markets, which underpin lending to individuals and businesses.’

Malcolm:‘How are you calming down volatility in the markets?’

Tom:‘Well, the bid-ask spreads in the Treasury markets were quite wide, so we started buying Treasuries.’

• ‘Same in the mortgage-backed markets, and we've introduced facilities around commercial paper, around asset-backed securities, around money market funds - to provide a backstop to those very important markets.’

‘Then Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which allocated $434 billion to us and Treasury.’

• ‘We’re using that money to create additional backstop facilities.
• ‘Every dollar of it has to be approved by Treasury under the Dodd-Frank Act.’
• ‘These are new facilities for the Fed, and ones we couldn't do if we didn't have Treasury agreement and funding.’

‘We've announced a municipal lending facility that should go live in a few weeks.’

• ‘We've announced a Main Street lending facility for four-year loans with first-year payments deferred for middle-market businesses that need that kind of liquidity.’
• ‘We've announced, and already expanded, some investment-grade bond facilities, both for new issues and for secondary offers, and so all those are now out there.’
• ‘We also established a facility that is intended to help free up bank capital to make more small business loans through the Paycheck Protection Program (PPP).’
• ‘All of those are new authorities we didn't have two weeks ago, and so we're plenty busy now.’

‘I do think we ought to be appropriately humble.’

• ‘This is a crisis where the first chair is held by the public health officials, and the second chair is held by the fiscal authorities.’
• ‘We at the Fed have the freedom to be able to move relatively quickly, but we're the third chair here, trying to help out where we can.’

Part 2

Why Inflation Should Not Be A Problem

'American businesses have changed how they think about pricing, and how they think about negotiating, and American consumers have changed in terms of their price elasticity.’

Malcolm Riddell:‘Economic theory tells us that all debt the U.S. is adding could be inflationary.’

• ‘How concerned are you about inflation?’

Tom Barkin:‘I'm not of the view that anything we're doing right now is going to drive runaway inflation.’

• ‘Part of that is because American businesses have changed how they think about pricing, and how they think about negotiating, and American consumers have changed in terms of their price elasticity.’
• ‘The rise in power of purchasing departments, and the rise in power of consumer price transparency create quite a formidable wall against runaway inflation.’

‘A good example of this: When the tariff issues were hitting China, and then the virus was hitting China, you started seeing supply chain problems.’

• ‘In both cases, you could have made a case that American companies could have been raising prices aggressively in the context of one or the other.
• ‘And you just didn't see it in the numbers.’

‘Why not? If you compare today to 20 years ago, prices are a lot more transparent than they used to be.’

• ‘You try to increase 5% to a consumer, and they're going to come up with another option. That's what the internet has enabled.’

‘And if you're a producer and your costs go up and you want to increase 5%, in a lot of cases you have to go talk to a Home Depot, or a Lowe's, or a Walmart, and you have to go make the case for your price increase.’

• ‘Now those folks have built their businesses on everyday low prices, and they're not interested in taking any price increases.’

‘These big low-price retailers have purchasing departments whose job is zero cost increases.’

• ‘And so if the supplier comes in at zero, they go, "Thank you very much.” ’
• ‘If the supplier comes in at plus 2%,they say, "No, why don't you make it zero?" ’
• ‘If the supplier comes in at plus 7%, the purchasing manager says, "I'd hate to bid this out, but if you force me to bid it out, I'll bid it out." ’

‘If you're a manufacturer, to raise your prices, you have to believe that all your competitors are going to do exactly the same thing, that your quality is unassailable, that you can't be replaced by somebody out of Malaysia, or Vietnam, or China - and very few manufacturers have that confidence.’

• ‘If you do have the confidence, and if you push it through, the purchasing manager will start right then on next year's buying.’
• ‘And that purchasing manager is going to go find somebody who can manufacture against you at a lower price.’

‘One other impact of the crisis I should mention: The big low-price retailers are going to get more share because smaller retailers are going to go under here.’