Fed Lowering Interest Rate Will Not Have Long Lasting Impact on Economic Growth: Joel Griffith

By Simone Gao

Simone Gao: Thank you, Joel, for being with us today.

Joel Griffith: Thanks for having me.


Ms. Gao: Yesterday the Fed had a surprise interest rate cut by half percentage point to mitigate the economic fallout from the coronavirus, and the Fed has now made a move like this since 2008. So, what does this tell us about the status of the world economy and the U.S. economy?

Mr. Griffith: Well, I think this shows us that our government and our federal reserve, they stand ready to take whatever action is necessary in the face of the coronavirus. But when it comes to the federal reserve actions, lowering the interest rate, that they planned excess reserve, that’s not going to have a real lasting effect on economic growth. And in the event that we do have a slow down here, that’s not really going to, to mitigate that slow down it, right? If people are choosing to stay home, whether it’s irrational fear or whether it’s rational fear, if they’re choosing to stay home from work, they’re choosing to not go out to eat or to go to a movie theater or to take a vacation, lowering the interest rates that the fed is paying on those excess reserves, that’s not going to undo that harm. The same goes for China where you have in the Wuhan province, you have a number of factories that aren’t yet back producing. There’s nothing that the central bank can do to actually increase that supply in the event of a panic. So, I’m hoping that our government continues what we’ve been doing otherwise, which is being transparent, keeping the public informed, making sure that our hospitals and that our local governments are ready to treat people that end up, with this illness. But I think it’s very important for us, for those in the media, for the government, not to sensationalize this, because sensationalizing the virus could become counterproductive and could lead to needlessly negative economic consequences.


Ms. Gao: So I agree with you. I think the lowering of interest rate has very [little] to do with boosting like a consumer confidence. But what about two businesses, you know, would that boost our confidence, like they will borrow more?

Mr. Griffith: Well, it might show that we stand ready to act, and the federal reserve should be ready to act in the event that there’s a liquidity crisis, right? If businesses cannot find access to credit because the demand for dollars is so high, that credit is drying up, well then this would be a roll, there would be a roll for the federal reserve in that instance to ensure the flow of credit. So this is a different situation though, than during the financial crisis, when we actually saw credit markets freeze up. We have not yet seen any indication of that happening here in the United States. So to that end, the federal rate cut, or the federal reserve rate cut, I don’t view that as doing anything really to insulate us against any long-term economic damage. That was done in order, in my opinion, that was done in order to try to make people more at, ease, make the business community more at ease. But really the, the goal, the role of the federal reserve should not be to step in anytime that we have a stock market correction or anytime that we see asset prices adjust, that is not the role [of] the federal reserve. The role of the federal reserve is to be there to step in when there is a liquidity crunch. And we haven’t yet seen that happen. Thankfully!


Ms. Gao: President Trump also talked about, you know, lowering a tax rate and regulatory ease. And do you think those will help?

Mr. Griffith: I think that this administration has done a wonderful job working with Congress over the past three years now to permanently lower taxes. We saw the most important corporate tax reform, business tax from, individual tax cuts, really, in a generation two years ago. So I think we should keep the focus on what we know works for long-term economic growth, and that is making our tax structure more competitive. We went from having some of the highest corporate tax rates in the industrialized world to now being about average. That’s a big improvement. So I think we need to be careful about temporary measures in response to this. Once again, similar to the federal reserve becoming involved in attempting to spur purchases possibly, that’s not what is going to generate that long-term growth. I know there’s been some suggestions about lowering the payroll tax. That’s, if there’s truly a panic that’s not going to do anything to rescue us from it. And I don’t see signs that we are going to panic in this country. And if that’s the case, a payroll tax cut that that’s nothing that generates the long term growth, the long term growth or permanent tax cuts and tax cuts on capital gains, on personal income, and on business taxes. A payroll tax—we saw what happened during the Barack Obama era, where we lowered those payroll taxes in order to do spur jobs growth. And we actually saw unemployment stay stuck at around nine percent. So we got nothing in return for that.


Ms. Gao: So you think I mean, no measure needs to be taken at this point.

Mr. Griffith: [Yes], if the Congress and the president want to explore further tax cuts—permanent cuts—then that’s wonderful. But that should not be done on a temporary basis. And we shouldn’t be looking at gimmicks just in response to to this crisis. I think we run the danger of politicians, and this isn’t limited to one part or the other, we’ve seen Senator Warren has proposed for $400 billion in stimulus related to this crisis. A thousand more than $1,000 for every man, woman, boy, and girl in this country and respond to this crisis, and you have to wonder, well, what is really the point of this? Is it to help us deal with a crisis or is this an election year giveaway? Well, I think we should stick to what we know works long-term. And that’s permanent tax reductions and a continuation of regulatory reforms.


Ms. Gao: How much do you think this coronavirus epidemic will bring down the US economy growth?

Mr. Griffith: I’ve been reading a lot of estimates, a lot of projections, from what I’ve been seeing a lot of economists are calling for a slowdown in the first and then second quarter, and then a fairly sharp rebound for the last half of the year. And that seems to track what a number of investment banks are saying about the Chinese economy as well. Where I know PIMCO just released an estimate I think over the weekend that called for a contraction on an annualized basis, and this coming quarter of six percent, around six percent, which might actually put China briefly negative GDP growth, but they’re also projecting a rebound in the second half of the year. Most of these projections are showing that even in China, where the virus has been the most impactful, and is likely to be most impactful, even in China, economic growth is still being estimated around 2.83%, which is slow for China, but it’s still growth. So likewise here in the United States, if we do see a softening of growth, we have to keep in mind a slow down in growth is not the same as negative growth


Ms. Gao: [It] does not equal to a recession.

Mr. Griffith: It does not equal to recession. And there’ll be some sectors that are impacted temporarily more than others. And we see this even with the stock market correction, if you look at those companies that have been most impacted, you have energy companies because people are expected to travel less. And so that’ll be a decrease in demand. We’ve seen cruise lines, movie theaters, restaurants, shopping malls, those have all seen their stock prices negatively impacted because investors are concerned that there could be an impact in economic activity. But what we’ll see if those concerns are actually justified in the longer term. If you look at past epidemics, if you go back over the last 35 years and the 11 epidemics that we’ve seen, whether it’s SARS, Ebola, Zika the swine flu in the United States, the stock market was actually higher six months after the outbreak and every one of those instances. And globally as well, nine out of 11 times, the global markets were higher six months later. So that’s not necessarily a perfect predictor of what the future might hold, but I think it’s worthwhile to look at what’s happened in the past.


Ms. Gao: Talking about China, I think this time it’s a little different. We know—I agree with you in 2003 during the SARS break, I mean, after the SARS outbreak, the Chinese economy really rebounded really quickly. It’s like a V shape, a rebound. But this time, things are different, right? Before, even before, the coronavirus epidemic, supply chains are moving out of China. So I mean now it’s happening even faster. So to what degree do you think the epidemic will push the supply chains out of China even more?

Mr. Griffith: Well, this entire crisis has brought a number of concerns about China into play, starting with the response, the lack of transparency. I think a lot of us find that deeply troubling and thankfully the United States does not seem to be going in that direction. But the lack of transparency on this, but then on other issues in China as well, is a concern. And the virus, the crisis in China is hitting at a difficult time already because we’ve seen a fairly dramatic slowdown in Chinese economic growth over the past few years. And some of those numbers themselves might be a bit exaggerated. And of course we’ve also seen concerns about the supply chain in general due to some of the trade friction that the United States has had, which I understood there’s already been a bit of a shift in that supply chain management. And there’s already been a growth in the number of companies that are looking for alternatives. So, I don’t know that this coronavirus will in and of itself bring dramatic permanent changes to that supply chain. But it definitely brings to the forefront the concerns that countries and companies have with having a full concentration and complete reliance in some instances on the supply coming from China.


Ms. Gao: So if you want to name the top concerns from the U.S. Companies, when they do business in China, if they have a thought of moving their productions out of China, do you think their concern was the supply chain concentration or they’re concerned about just general confidence in how the Chinese Communist Party runs the economy?

Mr. Griffith: I think there’s a concern on both fronts. Obviously we have—there’s a lot of meddling with the Chinese government in the economy in general. You have a number of state owned enterprises, you have the intellectual property concerns. And then there’s concern about how our country and other countries are going to continue to respond to those problems with how the Chinese government is involved with that economy. I think something, just anecdotally, that really drives home this point: If you look at some of the shipyards on the West coast for instance that seem to be unusually empty as shipping has really dried up because of this. I think this really is a giving companies a pause for concern. But similar to what we saw during the trade war before we saw some of the rollback on the tariffs, we saw companies pretty quickly diversify the sourcing of those goods across some parts, primarily across parts of Southeast Asia. So I think this might really spur a continuation of that.


Ms. Gao: I was going to ask you this, how difficult is it, and how long does it take for the U.S. Companies to move their production back to the U.S. From China?

Mr. Griffith: I’m not sure that we’re going to see, because of this, a wholesale transfer of production from China to the United States. And when I say that I’m relying on a lot of reports that came out in the midst of the trade disputes, that we’re trying to determine, where if we end up sourcing our supply chain from places other than China, how much of that is going to come back to the United States, and the vast majority of companies were not indicating that they were planning on moving that production from China to here. Instead they were looking elsewhere across the developing world. And I would anticipate that during this crisis we would see the same tendencies.


Ms. Gao: How long and how difficult is it to move to other parts of Asia?

Mr. Griffith: It really depends on the product line. And if you see too much of that capacity, very quickly moving elsewhere, then that means that you’re going to be fully utilizing all the available spare capacity in certain sectors. So if you want to really build out that capacity, all that sometimes cannot be done, I would say never can be done overnight. To actually build on spare capacity that takes a longer term capital commitment. And the physical construction lead up to that as well. And companies typically like to plan out those capital spending requirements over a period of years, whether you’re building it for your own production or whether you’re actually producing for other people. That’s usually done over an extended time frame. So once again with the coronavirus, I think this is really just possibly going to lead companies to consider over the longer term having multiple sourcing options for those companies that are right now reliant on that sourcing coming from just one geographic area in one country.


Ms. Gao: Last question, I asked this question to all my guests at CPAC, so regarding coronavirus, regarding the official numbers coming out of China, to what extent do you trust those numbers are true?

Mr. Griffith: Well, I think unfortunately because of the way that China acted initially, and how they’ve historically acted in some of these issues, there was not a lot of confidence in some of those initial numbers. I think the World Health Organization is doing their best to get a sense of what’s going down on the ground. I will say that if you look at the numbers coming from China, but then also around the globe, it looks as if the daily deaths from the virus peaked about a week and a half ago at around 160 each day. Of course all loss of life is tragic, but if you look at the trend over the past week-and-a-half, it has been downward. And I think we need to keep these numbers in context. So we’re talking at the peak of this outbreak around 160 people were losing their lives every day across the globe. Well during a flu season here in the United States, in a bad year you’ll see 45 million people infected with the flu and around 160 people will die each and every day in the United States. And of course you have to take precautions during flu season, whether for some people that means getting a vaccination, other people it means changing your diet. And a lot of other people it means sometimes not interacting as they would want to. But we deal with that outbreak each and every year. One of the things that’s coming out of the who is they are indicating that the mortality rate, the fatality rate for those that contract the virus is def—is higher than the flu outside of Wuhan province, It seems to range 0.7% and up. So that’s at least about five times as deadly as contracting the flu virus, that’s not exponentially higher, but really, right? But it is higher. But they also—it does appear that it might not be as contagious. So we need to balance the risk. That’s why I say let’s not panic. Keep, keep the numbers—and sometimes during, when these stories are being multiplied across the media, it’s hard to keep those risk elements in mind. But I think that those numbers are important, and that as we determine how we are going to live our lives in the face of this threat, it is important to actually consider what those risks actually are and not exaggerate them for ourselves.


Ms. Gao: All right. Thank you so much, Joel.

Mr. Griffith: All right, thank you.