Randall Kroszner, The University of Chicago Booth School of Business Deputy Dean and Professor of Economics and Fmr. Governor of the Federal Reserve joins the Yahoo Finance Live panel to discuss what to expect from the last Fed meeting of 2020.
AKIKO FUJITA: Inching closer to the finish line, lawmakers looking to hammer out a $900 billion stimulus as they work up against that Friday deadline to fund the government. Some disappointing economic data out this morning weighing on investors potentially here. Retail sales falling 1.1% in November, the first drop in seven months. And, of course, the central bank in focus today with the Fed decision out later today. And that is where we begin this hour.
We've got Randy Kroszner. He is the University of Chicago Booth School of Business Deputy Dean and Professor of Economics. He's, of course, the former governor of the Federal Reserve. We've also got Brian Cheung joining in on the conversation.
And, Randy, it's always good to talk to you. It feels like, right now, that we're seeing sort of these two contrasting narratives play out. On the one hand, there's optimism about where the economy could be six months from now because the vaccines have started to roll out. And, yet, we're also looking at the tightest business restrictions we've seen since the beginning of this pandemic. How do you think the Fed is going to be weighing these two today?
RANDY KROSZNER: Yeah, this is-- it's a real challenge for the Fed because, of course, you've got the short term, which is not looking so good. Not so great data out on consumption, unemployment claims up, and, obviously, more lockdowns or either just people being scared to go out. So it's going to be a tough next month or two. But in the intermediate to longer run, we've got the vaccine coming, which is just amazing that, in 10 months, we've gotten 10 years' worth of innovation, that we're going to get that vaccine. And so probably by the middle of next year, we're going to start to see things pick up.
So the Fed's-- it's pulled in two different directions. And so I think we're going to get a little bit more support right now, but not too much, because they want to keep their powder dry just in case something does go wrong going forward.
ZACK GUZMAN: It's also kind of tricky. I mean, it's a position I wouldn't want to be in, Fed Chair Powell. We've heard him kind of stress this in his congressional hearings, is that there's a lot in flux here, and, generally, the Fed is good at kind of giving guidance when they're working within the parameters. But we're still watching to see what plays out on the stimulus front, still watching to see how the vaccine rollout is going to go. I mean, there's so much up in the air. How difficult is that, if you are Jerome Powell stepping to the mic, to kind of try and give the markets a little bit more on forward guidance, but also just have completely, you know, unprecedented obscurity in terms of where things go from here?
RANDY KROSZNER: Well, I think he'll continue the message that like, basically, we stand ready in case something goes wrong to provide the liquidity, provide the support to make sure that we don't have a financial crisis, to make sure that markets continue to function. But he'll probably underscore that, we can't do it alone. I mean, if the virus is either scaring people from going to the office or consuming, or lockdowns and restrictions are preventing them from doing so, no matter how much the Fed does, no matter how many assets it buys, no matter how low interest rates are, that's not going to help. So he's going to say health and fiscal policy need to come in.
BRIAN CHEUNG: Hey, Randy. It's Brian Cheung here. Great to speak with you.
So I'm going to ask for a little bit of help here. I'm going to be in that press conference later on today. What is the biggest question right now? Because as we already laid out, there might not be any new action. It might just be them keeping their powder dry on quantitative easing. But there's so many other issues, like the extension of the Federal Reserve's liquidity facilities if there's a new Treasury Secretary, that fiscal package that's moving through in DC right now. What do you think is the biggest pressing question that you would like to ask the Fed chairman this afternoon?
RANDY KROSZNER: Wow. There are so many questions I'd love to ask Jay. But I guess probably the most important one would be kind of along the lines of what we were discussing on, given that there are a lot of challenges in the short run, but the long run looks a little bit better-- that there is some light at the end of the tunnel-- how are you going to manage the short run to the long run? How are you going to manage, in particular, the exit of, you know, all of the support that you're providing? How do you do that in a way that is not going to upset the markets?
We know that Ben Bernanke tried to do that with the so-called taper tantrum, and it didn't work out so well. Eventually, he got the markets calmed down. But how is he going to think about that? How is he going to get the markets prepared? What is he going to be looking at in order to get-- to make his decision as well as get the markets making the right decisions in advance of his decision?
AKIKO FUJITA: And, Randy, when you talk about the light at the end of the tunnel, what's your assessment on how long it will take for the impact of the vaccine to show through in some of the economic data?
RANDY KROSZNER: I think it's going to be a few quarters. Certainly, I think this is going to be a tough quarter with the increases in cases and additional restrictions. We will slowly start rolling the vaccine out. I'm here in London at our London campus, and, of course, they started the vaccine here a little bit earlier. But, still, it's going to take quite some time before a significant fraction of the population is vaccinated.
I think, fortunately, we'll start with the most vulnerable. And so that is going to be, I think, very helpful in reducing the number of fatalities. But then to get people confident to go out, you've got to have more and more people-- more and more people vaccinated. Because this is sort of an invisible thing. It's not something where you can just see, ah, that person has the virus and can infect me. People can look perfectly normal and can pose a risk to you.
BRIAN CHEUNG: Now, of course, at the same time, though, the Federal Reserve economists are not epidemiologists. But they are being forced to kind of factor that into the economic projections that they'll be offering. We'll have a re-up of that in the statement today at 2:00 PM with the summary of economic projections.
At the same time, the Fed is also going to be releasing new charts that map out the uncertainty and the risk that surround key factors, like real GDP inflation, also unemployment. Is there a risk here that that actually might cloud or make it even more complicated to read through the Fedspeak here, or do you think that these types of disclosures are actually a good thing for the Federal Reserve to have in its toolkit over the next period of time?
RANDY KROSZNER: Well, I think, eventually, it will be, but I think, at first, there's always an opportunity for misinterpretation and misunderstanding. It can be very difficult, when you introduce something new, to say, don't be scared by it. Because my guess is, most of the time, the Federal Reserve members are going to say, hey, this is a pretty risky time, and the downside risks outweigh the upside risks. But that doesn't mean that they think the economy is going to go off the cliff. It's just that they want to be prepared for that, and they want to warn people that they are thinking about that, and they're ready for those eventualities.
The challenge is, people could say, oh, my goodness, they said we're going to go off the cliff, and then people start to run for the hills. And that's not what they want. That's going to be Jay's very difficult job in the press conference, to be able to express what they really mean by this new information.
ZACK GUZMAN: Randy, I mean, we've heard such consensus from a lot of the investors we have come on this show to talk about how rosy 2021 is looking. A lot of people just in that bullish camp, and that always raises good questions about playing the other side here. I mean, when we're looking at what's being played out in this potential $900 billion stimulus that Republicans and Democrats are agreeing on, a piece of that's going to be stimulus checks getting sent out. We'll see where the final number comes in here.
But are there risks now that you're seeing maybe come out and potentially-- I mean, we already talked about the personal savings rate being a lot higher than people expected. Once we return to normal, there could be maybe a possibility of seeing inflation run ahead of schedule here and what that might do. Outside of that, are there any other risks that you're seeing potentially that might be overlooked right now?
RANDY KROSZNER: Sure, that's-- and in some sense, the Fed is hoping to get a little bit above 2%. I mean, they have that new average inflation targeting framework that said, well, gosh, we've been missing our target for the last eight years, because we put out a 2% target in 2012. We haven't gotten to 2% once. And so we kind of want to get 2% on average, and so that means we'll run a little bit hot, that is, allow the inflation rate to go above-- a little bit above-- go a little bit above 2% for some time. So we may get into a situation of 2% to 2 and 1/2% inflation. And I think the Fed's going to be comfortable with that.
And the key is, will the markets become comfortable with that? Will they say, oh, my goodness, the Fed's forgotten its 2% mandate, and does 2% to 2 and 1/2% mean that next time it's 2 and 1/2% to 3% and 3% and more? I don't-- that's not something that I think is a major concern. But I do think that there, again, could be an opportunity for misinterpretation because this is something new. This is a new framework.
AKIKO FUJITA: Randy Kroszner, Dean and Professor of Economics at the University of Chicago Booth School of Business. It's good to talk to you as always. And our thanks to Brian Cheung as well for taking part in the conversation.
RANDY KROSZNER: Happy holidays.