The Federal Reserve 'can't cure all ills': Former Fed Governor Randy Kroszner

Yahoo Finance’s Alexis Christoforous, Brian Sozzi, and Brian Cheung speak with Former Fed Governor and University of Chicago’s Booth School of Business Deputy Dean Randy Kroszner about what we can expect from the Federal Reserve today.

Video Transcript

ALEXIS CHRISTOFOROUS: Let's stick with the Fed now and bring in Randy Kroszner. He's a former Federal Reserve Governor, and he's now an economics professor and Deputy Dean at the University of Chicago's Booth School of Business. He joins us on the phone this morning.

Randy, good to have you here. You just heard what our Fed correspondent Brian Cheung had to say in his preview. Do you expect to hear a more hawkish Jay Powell today? Or do you think he's going to-- he's going to continue with his dovish stance?

RANDY KROSZNER: Well, I think he's going to continue exactly the way that he has been going. I'm saying there's an enormous amount of uncertainty. I don't think he is going to say that the positive jobs report gives you an all-clear sign to pull back.

He's going to saying it's one piece of data. Don't-- don't put too much focus on any one piece of data. And he knows that there are a lot of challenges going forward, so he's not going to pull back.

BRIAN CHEUNG: Hey, it's Brian Cheung here. So the Summary of Economic Projections will be in view with the absence of any major policy announcement today. But it is a little bit of a tightrope. I think it was Chairman Powell who was saying a few weeks ago that you don't want to read too much into these economic forecasts when you're trying to predict the virality of something that monetary policymakers can't really predict, which is the virus itself. What do you expect to hear from Chairman Powell when the dot plots are released? And do you expect that the Federal Reserve might kind of chain itself too much, possibly, to those forecasts?

RANDY KROSZNER: So Fed chairs, whether it's following Bernanke, whether it's Jay or Janet, have never wanted to be chained to those dot plots. In some sense, those dot plots were very useful during Bernanke's time to be able to convey, in a concrete way, how to keep interest rates-- or that interest rates would be low for an extended period of time. But they, I think, became more confusing rather than helpful, because there are a lot of different views across the members of the Federal Open Market Committee.

And so what you really want is a big dot for the-- for the chair, smaller dots for the vice chair and the head of the New York Fed, and then, like, one dot for everybody else. But each dot is created equal. And so that sometimes leads to confusion, because I think his view is the one that I just described, but that my guess is you're going to have quite a variety of opinions. I mean, it's just so difficult to predict what's going on, so you're probably going to see a pretty wide variance there. And he'll just say don't really focus on the dots themselves, basically listen to me, which is, you know, we're going to be providing support for a long time going forward.

BRIAN SOZZI: Randy, Brian Sozzi here. How-- do you think the market rally, the risk-on rally we've seen in markets has overshot the likely economic rebound in 2021?

RANDY KROSZNER: So it seems that there's a lot of optimism that the Fed can cure all ills, and they can't. You know, they can't address the health issues of the pandemic. They can't repair broken supply chains. They can't respond to policies that lock people down. No matter how much stimulus they try to provide, if people can't go out, if they can't go to work and they can't go to the store, it's very difficult to stimulate consumption.

So I think there's perhaps a little bit of a false analogy with what happened a decade ago when central banks didn't have the tools to try to respond to a financial crisis. This is not exactly a financial crisis. Well, this is not a financial crisis. And I think the Fed and other central banks have been good in making sure that we don't-- that this shock doesn't turn into one. But the Fed can't cure the challenges in the real economy when they're coming from something like a pandemic.

ALEXIS CHRISTOFOROUS: Randy, we know the central bank has already taken pretty drastic measures here to support the US economy, even more than they did during the 2008 financial crisis. But in your view, do you believe they can and should do more? And what might that look like?

RANDY KROSZNER: Well, they have done a lot. They've implemented the policies and set up the programs that we created while I was at the Fed back in 2000-- 2008, 2009. And I think that's excellent. They did that very quickly. They started buying a lot of assets, and they really wanted to make sure that markets continued to function and that this shock didn't turn into a financial crisis.

They have a number of programs, like the Main Street Lending Program, that really haven't gotten started yet. And so it'll be interesting to see how they implement those. And I think that's where we're going to see whether they do do enough or not. I think they've been quite reluctant to get into the direct lending business, which certainly, when I was at the Fed a decade ago, we were very reluctant, and we did not get into that directly.

So they're moving in very gingerly, but they may need to-- to act more boldly on that. But fortunately, at least right now, the economy seem-- or the labor market seems to be steadying. But I do think that we're going to need more support by-- through those lending programs when it comes to later some in the fall when a lot of these firms simply won't be able to reopen. The question will be called and many of them will have to-- have to declare bankruptcy.

BRIAN SOZZI: Randy, there seems to be this narrative coming back within some circles of Wall Street that a Biden-- a Joe Biden presidency would be bad for markets because of higher corporate tax rates. You were on the president's Council of Economic Advisors from 2001 to 2003. How would you advise a president Joe Biden on how to construct his tax policy so it's not so deterrent-- potentially deterrent to growth compared to what we saw from the Trump tax cuts?

RANDY KROSZNER: So I think that's-- that's crucial. So the objective is growth and-- and sort of good balanced sustainable growth. And-- and that should be the key, rather than sort of narrowly trying to redistribute from this group to that group.

You want to try to provide sustained and sustainable growth. And-- and so that should be the crucial guiding principle, regardless of whether it's Republicans or Democrats. You can do other redistributive policies, but in terms of deciding whom to tax, you want to think about how do we generate or regenerate growth after this enormous shock that has-- has come?

ALEXIS CHRISTOFOROUS: All right, thanks so much, Randy. We appreciate your time this morning. And be sure to stay with Yahoo Finance. We're going to bring you the Fed decision and Jay Powell's news conference this afternoon starting at 2:00 PM Eastern right here on YahooFinance.com, as well as on our app.