The Fed's Drive to Meet Its Mandates (January 29, 2020)

Kelly Evans: And do you think that we're going to hear whether that 4.2 trillion dollars is a good plateau or maybe it's just a mesa and it's going somewhere from here? What do you think, John?

John Bellows: You know, I think the message is going to be the Fed wants to have ample reserves in the system. They're very committed to that. They want the balance sheet to be as big as necessary, to have a lot of reserves. And I think they're going to err on the side of having a bigger balance sheet rather than lower, so.

David Kelly: But it is erring. That's a problem. They are making a mistake by I think being over easy here.

John Bellows: Maybe I could maybe I could just come back on that. You know, I think one of the things that's really important right now is what's going on in inflation. I think the miss on inflation is what motivated the cuts last year. We've seen no change in inflation expectations. Even though the Fed cut three times. The inflation outlook is still fairly subdued. And I think that's going to be the message from Powell today. The more he talks about inflation, the clearer it is what they're doing and the clearer the outlook becomes. As long as inflation is below target, I don't think David's going to be very satisfied because they're not going to be hiking rates.

David Kelly: But the problem is you want to cause economic stability. You want to facilitate economic stability. And if you look at the things that have got us in the last 25 years and none of it has been inflation and inflation has never been the problem, it has been asset bubbles. And that to me that ought to actually be part of their objectives is not to be so easy, as to cause asset bubbles.

John Bellows: You want to do that, but you also want to meet your mandates. And they're not meeting their mandate right now on inflation. I think that's driving this. And I think until they meet their mandate, they're going to continue to stay focused on inflation.

Tyler Mathisen: Let's talk about trade, if we might, for just a moment here. The president signed the USMCA this morning, couple of weeks ago. He did the phase one deal with China. How much have trade tensions been taken off the table as an economic headwind this year?

John Bellows: Last year in 2019, we saw global trade volumes contract. It was the first time in the last 20 years outside of a recession that we've seen lower trade volumes year over year. And the important point here is that's not just U.S. and China trading less. That's actually China importing less from Europe. It's China importing less from other Asian countries. There is a global slowdown in trade. Now, the reason that that's important is that's unlikely to turn around on a dime just because we've signed a phase one deal. You know, there's a bigger issue going on here. It's a bigger issue about slowing demand, about reconfiguring supply chains. And I don't think that's going to turn on a dime.

Kelly Evans: About shrinking globalization?

John Bellows: About some deglobalization, I think that's a little bit of it. And so the point here is if what you're looking for is a recovery in global trade, I think there's a chance that we're going to get that. But I think it's going to be fairly modest. And so I wouldn't have too high of hopes for that.