(Reuters) – A stock market hitting record highs in a pandemic might seem out of touch, but St. Louis Federal Reserve President James Bullard says Wall Street has got it right and he expects the United States to do better than many forecasters anticipate as businesses and households learn to manage coronavirus risks.
Though the situation seems chaotic, with federal, state and local officials laying out competing ideas about what activities are safe and under what conditions, Bullard said that shows adaptation in process, and will allow the country to fine-tune behavior and economic activity to what a “persistent” health threat allows.
“I think Wall Street has called this about right so far,” he said, noting how firms like Wal-Mart, with its mandatory masking and other rules, have found ways to operate that others will copy.
“There is a lot of ability to mitigate and proceed and most of the data has surprised to the upside…So I think we are going to do somewhat better,” Bullard said in an interview with Reuters. “I expect more businesses to be able to operate and more of the economy to be able to run…successfully in the second half of 2020.”
Bullard said he sees the U.S. economy shrinking 4% for the year, substantially more optimistic then the -6.5% median projection his colleagues made in June, and also less dire than the median forecast of economists polled by Reuters in mid-July. That saw a 5.6% hit to GDP for the year, with a catastrophic annualized decline of 32.9% in the April to June period offset by what will likely be similarly outsized growth numbers in the third and fourth quarters.
The Fed cut interest rates to zero in March and rolled out trillions of dollars in bond buying and other programs to support the economy. There may be more to come, but Bullard said he does not see a rush to make either longer-term promises about interest rates or to try to amp up the economy through more stimulus efforts.
That should wait, he said, until the health risks are more contained and the Fed wants to actively encourage more borrowing, spending, and activity to boost the economy when it is safer for people to fully engage in commerce again.
“At least for now expectations are that the Fed will stay where we are for a very long time,” Bullard said. “The idea that you want to stimulate things presupposes that the virus has gone away.”
RISKS STILL HIGH
The focus should be on managing through the next period, and Bullard acknowledged the risks are substantial – whether from the behavior of the virus as the weather grows colder and the conventional flu season arrives, or the drag on the economy as unemployed families lose government benefits and spending power.
Bullard said he feels optimistic on both fronts.
With a national vote coming in November, “you probably have Congress doing what Congress always does – pass a stopgap measure to get past the election,” that restores at least some of the benefits that have kept U.S. consumer spending on track and limited the number of loan defaults and bankruptcies.
On the health crisis Bullard acknowledged that his earlier, provocative call that the economy could be stopped in its tracks, kept afloat with government aid, and just as quickly restarted, was “shattered” because the virus “proved to be more persistent.”
But it also, he argued, has proved less deadly than early estimates of 1 million to 2 million U.S. deaths in 2020. Around 172,000 Americans have died so far, and the current 7-day moving average of daily deaths, at roughly 1,000, is about half where it was in April.
That, he argued, means another lockdown would be inappropriate – a view counter to at least one of his colleagues, Minneapolis Fed President Neel Kashkari, who called for a strict perhaps six-week lockdown of the economy to “crush” the virus.
“That is appropriate at the initial phase,” Bullard said. “Now you know a lot more…about which situations are dangerous and which are not so dangerous, so you can have more granular policy that mitigates risk…That is exactly what is happening.”
“You don’t need to shut down businesses that you don’t need to shut down.”
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