St. Louis Fed President James Bullard speaks with Yahoo Finance [Transcript]

James Bullard, president of the Federal Reserve Bank of St. Louis, spoke with Yahoo Finance on May 11 to discuss the April jobs report and what may lie ahead for Fed policy.

Below is a transcript of his appearance:

ALEXIS CHRISTOFOROUS: Now we know the Federal Reserve is closely watching all of this blistering, bad economic data that’s been pouring in. We’re going to talk about that now with James Bullard, he’s president of the St. Louis Fed, and our Fed correspondent Brian Cheung also joining us for this. Good morning to all. Mr. Bullard, thanks for being with us, you know, I just looked at some earnings reports lately and the words “economic depression” almost never show up in the filings. I mean, unless a pharmaceutical company is using it to describe a treatment for a medical condition. Last week, more than 40 publicly traded companies used the word depression, to describe their concerns about economic conditions. You yourself have warned of a depression-like scenario if the economy stays shut down for too long, with more than 20 million people now out of work, aren’t we already in a depression?

JAMES BULLARD: Well, 20 million is not a good number and it could go even higher. We think there are 47 million workers at risk because they’re in industries that have, you know, a lot of contact. And so those are the kinds of people that are being asked to stay at home now. And a lot of them are collecting unemployment insurance. I would call that pandemic relief in this situation because this is a different shot than the kinds that we’ve seen before. But if the shutdown policy goes on too long, you will get into a depression scenario and that would be very damaging, of course for the economy but also for health outcomes.

BRIAN CHEUNG: Hey President Bullard it’s Brian Cheung here, thanks so much for joining us. So the headline number that we saw from the unemployment report, obviously eye-popping with the unemployment rate you know almost at 15% it seemed like if you actually change some of the methodology under the BLS measurement it would actually be closer to 20%. I’m wondering if you have any sort of updated projections on where unemployment and even US GDP would be, since we got that data.

JAMES BULLARD: I think it’s definitely going to head higher from here, there’ll be more people filing for unemployment insurance claims in the weeks ahead. And by the time we get to the next jobs report, most likely we’ll be seeing an even higher number on this. But again, this is really pandemic relief. You’re trying to get income to the disrupted workers that you’ve asked to stay home to control the pandemic. That isn’t quite the same as, as the other kinds of macroeconomic scenarios or shocks that we’ve faced in the past. So I’m still modestly optimistic that we can execute this slowdown in the economy and come out on the other side with faster growth and an ability to handle the disease in a way that is compatible with running an efficient economy.

BRIAN SOZZI: President Bullard, a lot of focus, starting last week and now kicking off this week on Fed fund futures going negative and you had Ken Rogoff recently, noted Harvard economist, noted negative rates. If you boost aggregate demand and real unemployment, do you think that is the case and do you support negative rates?

JAMES BULLARD: I think negative rates have a very mixed record in Japan and Europe. It is not at all clear that they’ve been successful there. You could argue about it. And then the US has a different structure and in short-term funding markets which I think would make it problematic here. So I think we can use other tools to handle the situation. 

BRIAN CHEUNG: President Bullard, the Federal Reserve has used up about half of that $454 billion appropriated to the US Treasury and to the Fed as part of the CARES Act you’ve used it on a number of liquidity facilities but again you still have over half of that money left. I’m wondering, based on what you’re seeing right now, are there other areas then. If they’re not going to use negative rates, where you could see the Fed maybe deploying that money? In the form of perhaps in mortgage markets or even just as a direct money drop in the form of helicopter money?

JAMES BULLARD: Yeah, I think we have two goals here, right in this April-May-June timeframe the second quarter here where I think the main impact of this is going to be. One goal is, stay out of a financial crisis and the other goal is stay out of a depression. I think so far the liquidity programs have been pretty successful in maintaining liquidity and financial markets, that’s where there’s a lot of firepower with these 13(3) programs, and we’ve been able to make sure that there’s price discovery. Make sure there’s trading, which is exactly what you want here. And so, so far so good on that dimension, we could do more, but as you point out, we have used up the firepower that’s there already.

ALEXIS CHRISTOFOROUS: President Bullard, as more states begin to ease their lockdown restrictions what kind of a recovery does the Federal Reserve see for our economy? There’s been talk of a V shape, a U shape a W shape. Where do you see it falling? 

JAMES BULLARD: Because I try to stay out of the shape discussion. I’m not that clear what people really have in mind when they talk about these different letters. I think basically the second quarter of 2020 is where they’ll be the major impact that’s where you’ll see the very negative GDP number, way outside of anything that the U.S. macro economy has experienced. 

And then behind that you’ll probably see the best growth number that you’ve ever seen as well. So, if you want to call that a V then that’s a V. I think a lot of people are thinking about: Well how are you going to get to the previous level of output, or you can get to the previous trend line of output. And that I think is, we don’t know at this point. So basically. And then another point I would make here is, look at China. China was one quarter ahead of us so they had their bad quarter in the first quarter. You know down on the order of 40% at an annual rate and then the second quarter sure enough, looks like it’ll bounce back at 40% at an annual rate. Doesn’t quite leave the levels the same but the basic idea is that once you open up the economy and be able to deal with the disease in a way that keeps everybody safe, the economy is going to grow.

BRIAN SOZZI: President Bullard, how much lasting damage do you think the health crisis has had on the, on the US economy? Are we looking at a real prolonged period, let’s say two to three years of double digit unemployment?

JAMES BULLARD: You know I hope not, I really think we can avoid that. This is a known cause of a disruption in the economy. We’ve had a good response both at the Fed and by the Congress and political leaders. We put a lot of money on the table. I think we can get around this, and we can open up the economy in a way that’s safe. The third quarter would be a transition quarter, but I don’t really think we have to be thinking about many, many years of poor growth and high unemployment. 

Let’s look at two historical examples: 1958 pandemic. The CDC says 116,000 fatalities on a population of 175 million that’s actually bigger than the one we have here. And yet the ‘60s were a great decade for the US economy falling behind that. And then the famous 1918 pandemic, which was very devastating in terms of fatalities. Over 5% of the hundred million population at the time. But yet the roaring ‘20s, one of the greatest decades that we’ve ever had. So I don’t think there’s any necessary link between pandemics and macroeconomic performance. It’s a health tragedy and a human tragedy. That part is clear, but as far as a macro economic tragedy that doesn’t have to happen.

BRIAN CHEUNG: President Bullard, you mentioned Congress is a big part of this too with the fiscal response. Do you find the fiscal response to be adequate to set up the U.S. economy for a 1960s like recovery in that case? I know you’ve advocated on the health side for, you know, a federal push to actually fund the testing nationwide but also do you think that things like the PPP or things like the direct cash drops to Americans, has been sufficient so far?

JAMES BULLARD: I do think it’s been well-sized so far. If you just do back-of-the-envelope calculations about how much household income we’re going to lose, mostly here in the second quarter, you’re gonna get numbers in the trillions, probably. And so, the bill, depending on how you tally it up, does look like it’s, I guess 2.3 trillion is the number that people often put on it. Okay. Well, that sounds like basically the right number. The trick to this is all about execution and these effects are very uneven across the population. How are you going to make sure the right people are getting the relief that you’d like to provide? 

I do think using the unemployment insurance program is great, the PPP program was much harder to get it to exactly to the right firms. But when you’re in a crisis you know you do what you can. And I think the response has been quite good here. We’re doing the right thing and all of this is actually going well so far. And I’m hopeful that we’ll have a good transition in the third quarter and we’ll get back to pretty close to normal by the fourth quarter. 

BRIAN CHEUNG: And then lastly, you have many conversations with contacts in your district whether or not that’s households or local businesses, or medium, large-sized businesses, what are you telling them right now? What’s unique I think about your tenure is that you joined the St. Louis Fed as I understand it in 2008. So you’ve gone through two of these crises. I’m wondering what’s different about 2008 and how are you messaging that to your constituents and saying, here’s what the Federal Reserve’s response is going to be to make sure we can set ourselves up for recovery?

JAMES BULLARD: Yeah, I did move into this position in 2008, and I was a top staff person, well before that. But the thing is, every crisis is different and you can only draw so many analogies. I think that the 2007 to 2009 period, you had major firms on Wall Street that were on the brink of bankruptcy and that reverberated all around the world. So that was a very tough situation and a very different kind of shock. We know that financial crises take a long time to recover from, from Reinhart and Rogoff and others. And that’s exactly what happened. It took years and some would say we never really did fully recover from the financial crisis. 

This is a known shock, a pandemic health issue. It’s very disruptive. But on the other hand, we know exactly what’s causing this and if we can get the virus under control, we’d be in good shape as far as the economy goes. So any further fiscal action here I think should be directed toward actually solving the problem. One way to solve the problem is to have very widespread testing across the economy. From an economic point of view, that’s what would solve this problem because we want to know that when we’re doing an economic transaction that we’re not going to get sick. Way, way beyond any health benefits of that I think there are economic benefits of being able to test and know exactly where the virus is at all times.

ALEXIS CHRISTOFOROUS: All right, we’re gonna leave it there. James Bullard, president of the St. Louis Fed, thanks so much for being with us this morning. We appreciate it. 

JAMES BULLARD: Great, thank you. Thanks for having me.

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