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‘The Fed let us know they’re paying attention:’ Economist

Yahoo Finance’s Alexis Christoforous and Adam Shapiro discuss the Fed’s decision to leave rates unchanged with Joseph Minarik, The Conference Board Chief Policy Economist, and Sonal Shah, economist and Georgetown professor.

Video Transcript

ALEXIS CHRISTOFOROUS: First, I would like to welcome in Sonal Shah, Economist and Georgetown Professor, and Joseph Minarik, Chief Policy Economist at The Conference Board and former Chief Economist at the Office of Management and Budget under President Clinton. Great to have you with us today. Sonal, I'm going to start with you. Did the Fed do enough today to appease investors' worries heading into 2021 about how available the Fed is to catch this economy if it falters?

SONAL SHAH: I think the Fed basically let us know that they're paying attention to what's happening in the economy, and that they're going to continue to monitor what's going on. I think the decisions that they made today are probably based on what's going to happen with the stimulus and how we're doing with COVID. And so they're staying steady, but it gives them time in January to see what happens during this month and through the Christmas holidays.

ADAM SHAPIRO: Joe, I'm curious, IN trying to understand the sell-off then-- and it's not a huge sell-off, but the Dow is off about 100 points-- why are investors not getting the messages that we have in the past, that the Fed is buying $120 billion-- $80 billion in Treasury and $40 billion in mortgage-backed securities-- and they're still going to do it? So why are investors upset right now, Joe?

JOSEPH MINARIK: It might be the state of the pandemic. You know, how much damage is going to be done as the economy gets hit again with closures of businesses, both voluntary and involuntary. The Fed has repeated itself many times. I don't know quite how many times they can say that they are going to be vigilant and are going to support the economy, but you know, we have moods.

We do have uncertainty on the pandemic side. We have some uncertainty on the side of public policy, although the noises we're getting off of Capitol Hill now are positive. So I would be more calm myself in the near term, although, you know, this is a very risky environment, to be sure.

ALEXIS CHRISTOFOROUS: Sonal, on the topic of stimulus, if we don't get a deal, has the Fed left room to say, you know what? We will do what we need to do to support the economy? And what might that support look like from the Federal Reserve at this point?

SONAL SHAH: Yeah. I think they are paying attention to what's happening on the stimulus. It looks like we're moving in the right direction. Let's hope we can actually push this through before Congress takes a break for the holidays and the new Congress comes in. But the Fed has room to buy more if they want to.

They have the ability to expand. And they don't need to right now. I think what they're doing right now is being cautious and watching what's happening. I think unemployment wasn't as low as they had expected. But we're in a place-- I think we're also watching where we are with the crisis right now with the COVID crisis, and whether the vaccine coming out there is going to be reducing fears.

And I think it's just going to give them some time-- and they have the ability to do more if they want to. They just chose to stay steady. They didn't lower the amounts they were buying, they just stayed steady.

ADAM SHAPIRO: Sonal, when Jay Powell starts addressing everybody, he's been asking Congress for more fiscal stimulus. He's never put a number into the public discussion. Are they going to try and pin him down on a number he thinks Congress should be going for? A lot of people are saying, what they're going to do won't be enough.

SONAL SHAH: Yeah. My guess is they will push him, but I don't think he will. If I were him, I would not say anything right now. I would wait to see where the stimulus package comes out. I would also wait till Treasury Secretary Yellen takes over and see where they can work together and potentially do more when the new president takes over. I think there's just opportunity to do a lot, and I know the President-elect and Vice President-elect are thinking that through along with Janet Yellen.

ALEXIS CHRISTOFOROUS: Core inflation right now running at around 1.5%, substantially below the Fed's inflation target. Joe, this one's to you-- we have some inflationary-- or we have some inflationary pressures-- housing rents have been putting upward pressure on inflation over the past few years. That has been flattening out lately-- also slower consumer spending. We saw that, again, in the retail sales report for November may exert downward pressure on retail prices. So are we even going to get to the 1.8% that the Fed put out there today in 2021?

JOSEPH MINARIK: I'm not sure that we're going to get there in 2021. I don't think we're going to see any inflationary pressure soon. We have a very loose labor market, so we don't have costs in the domestic production. If you look at capacity around the world, there's plenty of it. Markets are competitive. Sellers do not believe that they have pricing power.

We are going to take some time to get back to the point where markets, from labor to products, are tight enough to begin to see some inflation. So that is part of the reason why the Fed is saying that they are going to have to keep the accelerator pressed down for some time.

ADAM SHAPIRO: Joe, the next composition of the FOMC, it's going to be Evans from Chicago, we're going to have Barkin from Richmond, Mary Daley from San Francisco, and Bostic from Atlanta. Will this be a more dovish or more hawkish FOMC with those people being the voting members?

JOSEPH MINARIK: That's a very tough call. But I think that in this environment, we're all doves now, simply because the economy is as weak as it is. I haven't seen any real fissures within the Fed in the face of this crisis. You did have a couple of dissenting votes a couple of meetings ago on the ground that the policy was not dovish enough.

So I think at this point, everybody's still stuck in the same foxhole. They're all praying. And because of that, I would expect to see the Fed working together for at least a while.

ALEXIS CHRISTOFOROUS: All right. We're just a couple of minutes away here from that Jay Powell press conference. Sonal, I'm curious what you are going to be listening for today during that presser.

SONAL SHAH: You know, I'm going to be listening to sort of how they're seeing the economy in the next few months and what projections they're seeing. Are they seeing slowing down? Are they seeing-- do they assume that the economy is going to continue at the steady rate or a rate of at least lowering unemployment?

I think I'd be interested to see how they also approach where they think the stimulus talks are, because that'll give us an insight as to where we think the economy is going to come out in January and February and what else the Fed may need to do then. So I'll be interested to see how they're forecasting and what they see around the horizon as some of the risks.

ALEXIS CHRISTOFOROUS: And, Joe, same question to you-- what will you be listening for today during that Jay Powell press conference?

JOSEPH MINARIK: I think my personal greatest concern is where the economy is going in the very near term. Because of the developments on the pandemic, because of the difficulty of members of Congress and the White House working together in this extraordinary environment, if we get a stimulus bill, I think we're going to be a lot more comfortable, but we're not going to know that before this press conference.

So I would imagine that a lot of the focus will be and a lot of Jay Powell's thinking will be about dealing with contingencies in the very near term and making sure that the Fed's position in providing support to the economy is very clear, such that when we do get another step down the road-- and ideally, this stimulus bill is done--

ALEXIS CHRISTOFOROUS: I'm going to interrupt you. We want to join Jay Powell now live at his press conference.