PEDRO DA COSTA: Welcome, everyone, to Real Vision's The Interview. I'm Pedro de Costa. It's my pleasure to introduce to you today David Andolfatto. He is Senior Vice President at the St. Louis Federal Reserve Bank's research department where he helps his boss, St. Louis Fed President James Bullard, figure out what's happening in the economy and what to do next with monetary policy. He's also a very broadminded economic thinker, which is why I thought he'd be a great guest for Real Vision. Thank you so much for joining me, David.
DAVID ANDOLFATTO: Thanks, Pedro. It's a pleasure to be here.
PEDRO DA COSTA: One of my jobs as a Fed reporter is to translate fed speak to the rest of the world. Real Vision has a fairly sophisticated audience of investors and so we don't have to translate terminology for our viewers, but I want to get into the Fed as an institution and how you operate, especially at a time of such deep uncertainty as we are now. Could you talk a little bit about how you go about looking at the economy and collecting data, especially at a time where there's so little visibility and so much uncertainty about the output?
DAVID ANDOLFATTO: Well, that's an excellent question. As it turns out, I don't do it personally but I have some very skilled colleagues who are gathering various data from data sources. Home Base, for example, is a real time database on employment activity. Thousands of establishments across the country. My colleague Max Dvorkin, in fact, is actively scouring that data source in real time, in fact, and it's actually he uses that data to compare it to the actual CPS numbers that come out every once in a while, and he's been remarkably accurate in forecasting what the CPS numbers are for employment, for example. That's just one example of the innovation that people doing what we have to do in this type of environment to get the real time data.
PEDRO DA COSTA: Absolutely. Can you talk a little bit about how this second wave and the news about the second wave is affecting the way that you look at the economy and just the nervousness that seems to be resurfacing here in the United States as opposed to other countries that appear to have gotten the pandemic more under control?
DAVID ANDOLFATTO: Yeah, it is a little disconcerting. One thing that's true about that data, let me refer and if anybody is interested, please email me or go to my Twitter site. I can send you the link to the data. Max very early on predicted a very, very sharp rebound in unemployment and in fact, just nailed the CPS numbers just right on with uncanny accuracy. His real time measurements have actually been pretty, pretty accurate and in light of that, it's a little disconcerting to see that the index that he is measuring in real time is showing a definite slowing and in fact, reversal recently and so this of course, is not inconsistent with what we know about how case counts and now, even death rates are going up in the country.
I think it's pretty clear that the actual shutdowns, the legislative shutdowns have some effect but it's really clear that the major, major economic drag is coming from people voluntarily just wanting not to go out and to protect themselves. Of course, this is a health crisis and it is important for people to take the precautionary measures to protect themselves. If employment has to go down in certain sectors, I guess we actually do want it to go down in some sense unconditional on the pandemic, we don't want to expose people to the ill effects of this pandemic. I think that it's up to fiscal policy in particular to help smooth the impact across the affected groups, but in terms of your question, yeah, it seems like perhaps we're in for a W recovery judging by how the data is coming in right now.
PEDRO DA COSTA: Absolutely. I feel like the word leveling off has been the key word that's been uttered among some Fed officials who have been speaking recently. In that context, I feel like anecdotally as you were talking about, anecdotal data becomes so important when the hard data is so fast moving. I'm just wondering before we get into the nitty gritty of policy that I do want to ask you about, and the tools that the Fed has at its disposal in a crisis such as this, are there any anecdotes that stand out to you as far as either businesses getting creative in adapting to the crisis or in terms of just stories of businesses that were just so hard hit that they might not survive? What are you hearing from business context? What stuff do you pick up from the district?
DAVID ANDOLFATTO: Just I think what everybody's seen out there is what I marvel at is like how this COVIDcrisis has actually seems to have accelerated a number of trends that have already been in place. For example, the internet has promoted, made the world a much smaller place so that physical proximity isn't as important as it was in traditional economies. You hear anecdotes of, not necessarily in our district but New York, for example. Landlords right now, for example, are offering steep discounts on rents, but there's still a lot of vacancies. There's a big question of what's going to happen to commercial real estate, especially in light of the fact that even given the existing technologies, Zoom, Skype and all this that, I think it's been a little bit of surprise for a lot of businesses that they can actually function reasonably well with this physical distancing.
It's not ideal. We're still early on, in the sense that this has been imposed very quickly, but if you want to think about how the technology is going to develop even further to enhance communications and permit economic exchanges in the absence of physical proximity, I think that the changes are going to be profound. These changes I think we're happening anyways, but what is really interesting is how quickly they've been accelerated. Because the adjustments are going to have to be made in very short order, I think it's going to be very disruptive for that matter, but it is interesting to see.
PEDRO DA COSTA: It's an imposed social experiment that I think very few firms or institutions were willing to go out there on a limb and be the first ones to do an all remote experiment but then when everybody had to do it, you got to test the functionality of it in real time. It has, I think, for some institutions, maybe not all, but for some organizations, it's proven more functional than they expected. I think we're going to see a lot of that. Of course, there's so much work that can't be done remotely in this economy that, of course, exposes a lot of people to direct contact or to unemployment.
I do want to ask you about the Fed's toolkit, because of course, you're around for the last crisis. You've been at the Fed a long time and we didn't expect that the Fed would have to be reaching this far into its toolkit this quickly. Of course, this was the ultimate exogenous shock, which is a pandemic. I keep thinking about how far down the road of the unison between monetary policy and fiscal policy we've come. I just wonder if you could speak to that, about monetary and fiscal cooperation, whether it's constructive, whether it's here to stay or whether it's just an emergency measure that we're seeing for now.
DAVID ANDOLFATTO: Well, for sure, in emergencies, you tend to see agencies cooperating a lot more than they otherwise would, and so this is not unusual, what you're witnessing right now. We understand that the Fed and the Treasury and Congress as well understand that this is something that needs to be dealt with in a cooperative and coordinated manner. This brings up a whole host of questions about what is the nature and the role of Fed independence? What does that mean in any case? Why wouldn't the Fed in some sense, cooperate all the time with the Treasury? Indeed, you could even ask the question of why does the Fed even exist as an independent agency in the first place?
We could, Congress could fold the Fed into the Treasury, for example. I think that what one can expect during the crisis is continued close collaboration and coordination between Fed and Treasury as it should be the case. Going forward, that might be a different situation. I don't know, because Congress has given the Fed certain mandates, and given those congressional mandates, the Fed really doesn't have much choice, there's some leeway of how to interpret them exactly. Given those mandates, the Fed will have to do its best to pursue them.
One of those mandates is price stability, so like as it's represented in our official 2% inflation targets. Hypothetically, if you could ever imagine such a day, and I think very few people can, because they haven't seen inflation for a long time. Imagine, I don't know, maybe the global demand for the US dollar and US Treasuries starts to wane a little bit and deficits keep on pumping out US nominal liabilities at a continued rapid pace. You could very well imagine a world where inflationary pressure does start to take off. If that happens and if we're past the health crisis, and now suddenly, the Fed is presented with a bit of a difficulty here because it has an inflation mandate.
The question is what is it going to do about it, and we know central banks typically try to raise interest rates aggressively to contain inflation. This might go against the desires of the administration and Congress. I could imagine future scenarios where conflicts arise and these conflicts could be reconciled by Congress passing amendments to the Federal Reserve Act, if they feel like the Fed should have different mandates. That's entirely fair. In terms of answering your question, yes, during crisis, you can expect continued close collaboration. It's easy for the Fed right now to help out because inflation is nowhere to be seen and we're just doing our part to help the Treasury and Congress do what it needs to do during this crisis.
PEDRO DA COSTA: Again, to that point, the term helicopter money gets thrown around. Are we doing helicopter money? Are we close to helicopter? Let me phrase the question in the following sense. I had a discussion with the BIS chief economist high, Hyun Song Shin, this past week. The annual report of the BIS frames the dividing line is as follows. Basically, if the central bank's stated intention is to support the economy and market function, then it is not doing monetary finance but if you enter a period of fiscal dominance, where the monetary institution becomes literally subordinate to fiscal goals, as sometimes happens in wartime, then you've crossed that line and that becomes dangerous for independence. How do you think of that?
DAVID ANDOLFATTO: Well, I guess, again, I was going to say, when people say, are we doing helicopter money, it's important to first define what one means by the term. I would have defined it a bit differently than the BIS definition, fine. In some sense, who cares what we call it. I'm not really big on labels to be quite honest. The question is, is are we doing the right thing? In light of the definition you provided, I would say the latter. I suppose we're doing helicopter money by that definition. We're supporting the Treasury. The Treasury is financing Congress's desired spending programs and Congress is a representation of people's preferences. We voted for these people collectively.
In terms of the big definition, I would say it maps into my earlier discussion. During the crisis, it looks like we're doing helicopter money because we're collaborating, coordinating and the fiscal authorities clearly taking the reins. By the way, this is embedded in large part in the Dodd Frank Act that altered the emergency 13(3) provisions of the Federal Reserve Act that prohibited the Fed from acting unilaterally in these emergency lending programs, so we are--
PEDRO DA COSTA: This seems to [?] the Fed's credibility in a way, because I remember when that 13(3) facility was changed during Dodd Frank, there was a worry that the Fed would lose its capacity to react, but in fact, that feel like having that the Treasury's funding backing gives some credence to your ability to [?].
DAVID ANDOLFATTO: Oh, yeah. I know, I think in Bernanke's memoir, and he states quite clearly that he hated having 13(3), because he felt like the Fed being an unelected body, you're really treading on shaky ground. What Dodd Frank effectively did was provide support by the Congress congressional and Treasury support and it stipulated that the Fed would have to act in conjunction with the Treasury during times of enacting these emergency measures. Hey, guess what, that's what typically happens in an emergency anyways, but now, it's codified in the Federal Reserve Act, but I think you're right. I think it does lend additional credibility to the Fed. PEDRO DA COSTA: When you mentioned that we haven't seen inflation for a long time, I could hear the Real Vision viewers cringing and saying, look at asset prices. The Fed is-- all the inflation is going into asset prices. As we talked a little bit off here, I hear two criticisms both from market folks and from some of our viewers that the two things, the Fed's policy is distorting asset prices and therefore, we can no longer read future economic signals into the bond market and other markets because the Fed is so deeply involved. Secondly, that by boosting asset prices and sometimes not helping the economy as much, the Fed is increasing already high inequality. What do you make of this two environments? DAVID ANDOLFATTO: It's a tough question. Yeah, of course. I'm very familiar with this charge, the Fed is creating inflation. The official numbers that we're reporting aren't measuring true inflation, look at some-- the price of the good I buy at the grocery store is going up very rapidly, how can you say that there's no inflation, and stuff like that. First of all, there's a difference between asset price inflation and inflation in the way that we define it that is minced in the Federal Reserve Act by price level stability, we look at a broad base of consumer goods and services, the PCE Price Index. In that index, you see some prices going up and some prices going down. On average, the price index is not going very rapidly.
In that sense, the Fed feels like it's fulfilling its price stability mandate. There is no mandate to stabilize asset prices. Maybe your viewers feel like there should be a mandate to do something about asset prices and I say all the power to you, lobby your congressman, lobby your representatives, and explain to them why you believe the Fed should have a mandate to do whatever you think is appropriate in terms of asset prices. We don't have a mandate for asset prices per se, our mandate is to try to keep the price level growing at a low and stable manner to promote price level inflation certainty, and also to do whatever we can to promote the growth of employment, both in terms of the opportunities that people have, and also the wage goal.
PEDRO DA COSTA: Let me interrupt you for one second, I just wanted to ask you about it, because when you say you don't have an asset price mandate, one of the folks say, look, every time stocks fall a certain amount, the Fed ends up moving. The Fed reacting to asset prices in that way. I try to resort that the Fed is reacting to asset prices as it sees asset prices reflecting future economic activity, but the market people don't really buy that.
DAVID ANDOLFATTO: Well, the market people have to think about, it's true that suppose the stock market starts to fall precipitously. Now, why might it do that? Well, guess what? Usually, it's because some bad news about the future development of the economy has arrived. Well, guess what? The Fed does have a mandate to react to that bad news. The fact that the market came down in reaction to that bad news, what do you want us to do about it? You want us to raise interest rates? You want us to cause the market to collapse in the face of even further? It's just not the right way to think about it.
It's true that the Fed does understand, the FOMC does understand the role that our interest rates do play in helping to prop up asset prices, and oftentimes, even Bernanke has come out explicitly and said, part of the mechanism of lowering interest rates is it does increase asset prices, but assets are widely held and people's pension funds as well. It's something that you'd expect the Fed to help promote to keep the wealth intact to help promote spending in the face of a sudden downturn. It's not like the Fed is specifically trying to make Tesla stock go to $1,000 or something like that.
I would argue that it's true that despite the fact that there's no mandate for asset prices in the Fed's mandate, we do take a look, we do monitor asset prices, but we monitor all sorts of data, and that usually the actions we take that seem to benefit stocks also those same actions tend to benefit the broader economy. It's not surprising that the stocks would react positively to our interventions. That's how I would respond to those criticisms.
PEDRO DA COSTA: What about the inequality front, the fact that the prices are just helping rich people and everybody else is left out?
DAVID ANDOLFATTO: Well, I find that argument very curious because you too hear lowering interest rates right now do promote asset prices, there's no doubt about it, and also like long bonds, so people who are holding long bonds have seen huge capital gains in their bond portfolios. Asset prices have been elevated. People say, well, there you go. There's an example of the Fed promoting the interest of the rich. Well, I'm old enough to remember back in the 1980s, when the argument was exactly reversed, when interest rates were very high, and I had the same cast of characters complaining that the high interest rates were promoting the rich because these rich bondholders were earning this very high interest rate on their bonds, and they were characterizing that high interest rate policy is basically basic income for the rich.
I don't know. If the Fed has high interest rates, we're helping the rich, if the Fed has low interest rates, we're helping the rich, it seems like there's really nothing the Fed can do. You're always going to get criticized for helping the rich. My view is the Fed has an explicit set of mandates to try to do the best it can to help all Americans, the whole economy the best it can, given its limited tools and given its congressional mandates. Anything the Fed does will have complicated redistribution of effects. We understand this, but our hope is that if we try to do what's best for the whole economy the best we can, that it's up to Congress to patch up and enact the redistribution that is necessary to fix any unintended consequences on the distribution front.
Then the Fed together with Congress can together have a sound good monetary fiscal policy with an appropriate redistribution scheme. That's how it should work in principle. What can the Fed do? It has a limited set of tools and a limited set of mandates. We do not have direct