The Federal Reserve has lowered the minimum Main Street loan size. Morgan Stanley Investment Management CIO of Global Fixed Income Michael Kushma joins the On the Move panel to discuss.
ADAM SHAPIRO: So we invite into the stream, Michael Kushma, Morgan Stanley's Investment Management CIO of Global Fixed Income. Good to have you here. A lot of what you talk about, Michael, is the Fed. And we could have had a discussion about the upcoming meeting on the 5th, but I got to start with the headline news. I mean, is this a move that was expected? How do I interpret this as an investor about what the Fed's signaling?
MICHAEL KUSHMA: I think it's signaling that they can do more, and they will adjust their programs as needed to try to improve the flow-through of the resources they have into the broader economy. We all know that the small, medium-sized enterprises have been most hurt by what's going on in the pandemic. Large companies have access to capital markets, we have low corporate borrowing rates. They've got the cash. We've seen cash reserves grow quite dramatically in corporate balance sheets.
But it's the small businesses, which are struggling to stay in business. And what was said earlier about loans is important. If you're a small business, you can borrow money now easier than you could a week ago. But still the question is, will I, can I stay in business? For how long? Will the market, will I only have 25% capacity, 50% capacity, will have to shut down? So the Fed is trying to help. But as said, they could only lend money. Only the Treasury has the ability to forgive it as part of a fiscal policy initiative.
JULIE HYMAN: Let's pick up on the fiscal policy initiative there, Michael. It's good to see you, it's Julie here. You send your note to us that we are seeing monetary and fiscal policy work together for the first time in decades. But of course, we've got the stall on the fiscal side right now. What are the implications for the Treasury market from that? I mean, it seems like the bottom line for the Treasury market is what the Fed is doing, and we are going to see for the time being, a ceiling on rates because of that.
MICHAEL KUSHMA: Yes, I think the Fed has within its power to control interest rates all the way up the yield curve if it so decides to exert that power. Up till now, it hasn't wanted to do that. It hasn't wanted that for a long, long time. It controls short-term interest rate, the overnight rate, and lets the market set the rates alongside the quantitative easing that it's doing, the purchasing it's doing along [INAUDIBLE].
Yes, at some point if interest rates rise, and they've been rising lately in the past couple of weeks, if they rise to levels, which seems to jeopardize the economic recovery which we are having, particularly in the absence of any new fiscal expansion coming from the government, the Treasury, and whoever is in power post election day next week, I think they will do more in terms of additional quantitative easing and using more tools like the Main Street Lending Program.
They will try to maximize what they can do to help the economy along the way. But there's only so much they can do. But as you said, they can influence, strongly influenced longer term interest rates if they so think it's in their interest to do so.
ADAM SHAPIRO: Can they really? And I want to have this discussion in a way that an average investor like myself might be able to understand inflation. Because the Fed kept missing its goals with inflation before the pandemic. And for years, there was the discussion about what are they perhaps not now factoring in with inflation. So why should I as an investor today, given what used to be the case, be worried about inflation when it hasn't been the case for over a decade?
MICHAEL KUSHMA: Exactly. The Fed changed their operating procedures formally in September to reflect the fact that they had missed their inflation targets for decades and inflation ending up being below what they expected. So they're trying to adjust their strategy to prevent this continuous under-shooting of inflation to raise inflation expectations, to get individuals, households, corporations to be more confident that inflation will drift higher, not sharply higher, but drift higher rather than settling in at a sub-optimal optimal level.
And that's a tough a tough cookie to crack, so to speak, because once you have inflation settled in at such low levels for a long period of time, it's hard to convince people, especially in the middle of a pandemic and have record high unemployment, to have people are really worried about inflation medium term. That said, inflation expectations in the bond market have been rising over the last several months. So that is working at the margin.
Unfortunately recently, nominal interest rates, long-term treasuries are also rising, offsetting the effect of rising inflation, helping reduce real borrowing costs in the economy. But you're actually right. It is a challenge the Fed has, and they have to continually impress upon the market that they can do more. They can ease policy further, if necessary. But they will also take their time doing it and wait to see how fiscal policy plays out over the next several months.
ADAM SHAPIRO: All right, well, grab the popcorn, because the Jay Powell show is back on stage on Friday, November 5. But first we gotta say thank you, Michael Kushma, Morgan Stanley Investment Management CIO of Global Fixed Income. Always good to have you here.