Fed warns of a slowing recovery, leaves rates unchanged

Michael Cox, Federal Reserve Bank of Dallas Former Chief Economist, joined Yahoo Finance to discuss the latest Fed comments.

Video Transcript

SEANA SMITH: --down for us. We want to continue this conversation. And for that, we want to bring in Michael Cox. He's a former chief economist for the Federal Reserve Bank of Dallas. And Michael, great to talk with you again. We just heard, Brian did a great recap there just in terms of the latest updates from the Fed. Still lots of concerns just about the new variants of the virus, what that could mean for the economic recovery. But what are your big takeaways from what we just heard from Powell, and what you think we should expect over the coming months?

MICHAEL COX: Well, I was very impressed with Jerome Powell's conversation there. These are the money guys, but they very, very much understand the basics of what's driving this. And it's the process of creative destruction. The best economist I have ever come across in history is Joseph Schumpeter, who described the capitalist process as one of creative destruction.

And that's what we go through on a daily basis in the capitalist economy. Out with the old, in with the new. Usually, it happens through creation causing destruction. This is the first time in the history of the nation that the process has been reversed and the destruction came first.

And this time, it was caused by the virus. And the creation has had [AUDIO OUT] catch up. And I just found it astounding to see what a rebound we had in GDP growth and job growth coming back from a 100-year pandemic. I was totally shocked to see a 33% rebound in GDP growth. I was totally shocked to see the rebound in job growth.

So I think that the optimism that was in Chairman Powell's speech was totally called for. And it was-- it's what we need to focus on. This economy is doing a fantastic job of being resilient and coming back. Some parts of the economy are doing better than others. Some parts of the-- some parts of the country are doing better than others. Dallas Fort Worth is back to within 1% of its previous job peak.

So is Phoenix. So is Atlanta, other parts of the country. The coasts aren't doing that well, but middle America is doing better. The free market states also are doing better, the ones that rank high in free markets, and the ones that have big governments aren't doing that good, comparatively speaking.

But overall, the nation is making an astounding rebound from some pretty amazing times. We were headed this way, toward a more virtual economy, anyway, but we've been fast-forwarded to something like 2030. So--

ADAM SHAPIRO: Michael?

MICHAEL COX: --I think the Fed has a great understanding of what's going on.

ADAM SHAPIRO: When-- he talked about the incredible creation of, for instance, real estate going into the virtual transactions, a lot of people, and that is a remarkable creative process from destruction, but he also-- and you'd know much better than us, but there was this question which didn't-- well, they did talk about it, asset bubbles. Years ago, I forget who wrote it-- might have been Meltzer-- that the policy had always been let the bubble inflate, and then clean up the mess afterward. And there was a question about stocks, are we creating a bubble with the easy money policy. He deflected, and he said, no, we're not, essentially. But are they? Because the markets right now are taking a breather, but the easy money is here to stay for a while.

MICHAEL COX: Well, I agree that easy money is here to stay for a long time, but that's being caused not just by monetary policy. You know, the Fed-- OK, the Fed-- the money supply, the into is up about 26% since January, but prices are up 1%. Some people call that easy money because we had this fast growth in the money supply. But had the Fed not accommodated this enormous increase in the demand for money, we would have had a period of deflation.

And that would have really wrecked the economy, like it used to before we had the creation of the Fed. So I'm not really sure we've had-- judging by the inflation experience we've had of almost no inflation, I'm not sure monetary policy has been that easy.

It's just been accommodative to the tune of allowing the private sector to basically have the money it wanted, and have-- you know, people shifted-- when COVID hit, people shifted their asset-- I, in particular, opened up every deposit account I could at banks with a $250,000 deposit limit. And a lot of people did to get that protection. So I think that-- I don't think we're seeing an asset bubble being driven by the Fed, to basically answer your question.

SEANA SMITH: Well, Michael, then going forward, you're saying that the economy is very resilient. When you take a look at the market, yes, we're down today, but we're not too far from those all-time highs. Do you think additional fiscal support is necessary at this point, or do you think that this is something that should be discussed in a month or two, once we figure out where we are at that point?

MICHAEL COX: That's a really tough question, whether additional-- look, we are definitely digging a hole with government debt. We're going to have to go through this creative destruction process. To a certain degree, continued fiscal stimulus just postpones the inevitable. And that's people getting that new job. And it can be shown through all kinds of econometric research that, when you postpone people finding that new job, it doesn't make things better. People are going to-- we are going to have to get that new job.

So I don't even know the answer to that question. But to come back to the asset bubble question, if you want to know why I think that the stock market is as high as it is, it is because their assets, investment is flowing in because America is still a great place to invent-- to invest. We are still innovating. We are still a great place to get a great return on your assets.

Money is flowing in from all over the world. Not-- this is not-- and we're not the only people who invest here. People-- money comes from all over the world to invest in an economy that is growing with all these great stocks. And that's what's driving the stock market. And there's nothing changing there. We were in a revolution. We're in a technology revolution.

We were in the longest expansion in US history. And that's what's really driving the economy. That's what's really keeping us buoyed up like we are. Look at all these stocks that are still going around us, with Apple and Google and all these great things happening. Nothing has changed there. The real underlying strength of the economy is still here.

SEANA SMITH: All right. Michael Cox, always great to speak with you. Former chief economist for the Federal Reserve Bank of Dallas. We hope to talk to you again soon. Thanks for taking the time.