S&P Global Ratings Global Chief Economist Paul Gruenwald joins Yahoo Finance’s On The Move to break down the economic outlook for the U.S. and weigh in on Fed Chair Jerome Powell’s public remarks on the U.S. central bank’s coronavirus programs.

Video Transcript

JULIE HYMAN: Now, I do want to get more into what the Fed chair had to say. We're joined by Paul Gruenwald. He is S&P Global Ratings Global Chief Economist joining us from New York. So Paul, as we heard the Fed chair talk about that Main Street Lending Program, which appears to be the next phase of its aid, given that it still hasn't happened yet, what are your expectations for-- for how much further that's actually going to help small businesses?

PAUL GRUENWALD: Hi, Julie. It's good to be back on the show. Well, yeah, I listened to the interview with-- with Chairman Powell. I think he was pretty clear at the beginning that the Fed, in one sense, is trying to stay in its lane, as he put it, which is, you know, the mandates are low inflation and full employment. So he was explaining why the market isn't getting credit to some of these medium-sized firms.

So his rationale is that the Fed can help credit flow to those firms so they can keep employment and build the bridge to the recovery. So, as you said, it's not up and running yet. But that seems to be [AUDIO OUT] that seems to be consistent with the Fed's mandates. So I mean, let's see what happens. But I think, you know, within the mandate of the Fed and within the circumstances we're in right now, that seems like a pretty sensible next approach.

ADAM SHAPIRO: Paul, was there anything that upset you or stuck out to you from the Fed chair? I mean, he took a wide range of topics. He brushed aside negative interest rates again. But he also brought up in-- income inequality, expecting it to grow because of the pandemic, but saying that the Fed isn't causing it.

PAUL GRUENWALD: Yeah, I don't know if that would get-- that would get me upset. I mean, it's not-- it's not mission creep. But I think what the Fed tries to do, and other organizations as well, I mean, the IMF has been talking more about inequality as well, is that, you know, we've come to a view that that's actually having an impact on macro outputs on demand.

If we've got too much income going to the top end, it-- it reduces demand, and in spending, and growth, and inflation pressure. So I think that's part of the mix now. So I think we're going to see more-- maybe a bit more specificity out of the-- out of the Fed with regard to inequality, but again, kind of within the mandates and staying in their lane. But the lanes being divide-- defined a bit differently than perhaps it was before this particular crisis.

RICK NEWMAN: Hey, Rick Newman here. Question is just about--

PAUL GRUENWALD: Hey, Rick.

RICK NEWMAN: --what's likely to happen over the next few weeks, in a couple of months. I mean, we're hearing reports of a lot of businesses running out of money. The aid is going to run out for individuals. Concerns that just a lot of businesses won't even make it through the summer. How bad is this summer going to be, do you think?

PAUL GRUENWALD: Yeah, well, origin-- remember, the original assumption that this was going to be a short, deep hit. And the longer it goes, you're right. I mean, the balance sheet is only going to support businesses for so long. If the point of fiscal policy, and this is really a fiscal issue not a monetary issue, if the point of fiscal policy is to one, cushion the parts of the economy that gets hit hardest, and two, build a bridge to the recovery, if that recovery is going to take place later rather than sooner, then we're going to need a longer, stronger bridge.

So that gets into your question. So if that's the objective, then we, perhaps, are going to need more spending because, again, the firms have some protection with the size of their balance sheet or their cash on their balance sheet. But if this goes on longer, we're going to need some more fiscal support. I would agree with that.

JULIE HYMAN: Paul, I want to bring in some of the economic data that we got today because it was pretty striking. And we-- we've gotten-- I don't know, I haven't gotten used to the striking economic data that we've gotten thus far. April consumer spending down a record, 13.6%.

Personal income up 10 and 1/2% because the stimulus checks, although pretty much all of that came from stimulus. It didn't come from actual income that people were bringing in from working. Personal savings rate rising to 33%, which is also striking. Does that give you some hope, that particular number, that people are-- are building more of a cushion here?

PAUL GRUENWALD: Well, if they're saving, then they're not spending. So if we're hit by a massive-- massive shortage of demand on the private side, which is why the government's spending so much money to support growth, that's probably not where we want to be. Maybe one accounting thing I wanted to throw in here, and I think we overlook this some time, for every saver there has to be a dissaver.

So we have an accounting identity which says net saving has to be zero. So what we're actually seeing, and Julie, you made this point and we've seen it in the German data as well, we've got big increases in household savings. So some other part of the economy must be dissaving. And right now, that's the government.

So we can think about these outsized government deficits that we're-- you know, they're appropriate now, but we're potentially worried about them over the medium term. That's just the mirror image of the counterpart of all the savings we're seeing on the part of the household. So hopefully, we come out of this, and we get a vaccine or a treatment, and confidence starts to go up, and that savings rate starts to come down. That's going to be balanced by the government deficit shrinking as well.

So that's all part of the accounting puzzle that has to happen. But that's just a driver of low demand and the driver of the big government deficits. So we're seeing that in a bunch of advanced countries. That's actually a worry, I think, rather than a cause of comfort right now.

JULIE HYMAN: I guess I think of it as a cause of comfort on sort of an individual basis, if people are--

PAUL GRUENWALD: Right. We have this fallacy of the composition or the fallacy of savings. Well-- or composition of thrifts or a fallacy of thrift. Right. Yeah.

JULIE HYMAN: I do want to ask you, as well, about your various scenarios that you wrote in a note to us, where you talked about what economies are going to look like after this. And you actually say China is going to be the most likely to be in your case A, which is moving to its pre-COVID path. How quickly do you think that happens? And how much does that then--

PAUL GRUENWALD: Right.

JULIE HYMAN: --potentially feed into growth around the world?

PAUL GRUENWALD: Yeah. Well, we've got these three buckets, as you said. The A bucket's the good one, which is where you jump back on to the pre-COVID path. And then you've got a B, where you kind of have the same slope, but you shift down a bit. That's a typical US outcome. Then you've got sort of the GFC outcome, where you not only lose output, you're on a slower path.

China seems to be in the best place through the fact that it got-- got through COVID quickly. It's got a state-run economy. It has at least an implicit growth target. It dropped the explicit one this year. But we think they can potentially get back to where they were before. Again, the timing depends on the-- mainly on the health situation.

What we've seen in China is a clear bottom in the data, and some of the big enterprises have gotten back up to full capacity. But again, the service sector, the small and medium enterprises, the same parts of the economy that have seen the big hit here in the US and also in Europe, they're slower in getting back to speed. So our Asian economists, our China team's been building in a bit slower recovery in China because we're just not seeing the resilience in that part of the growth equation. That's-- that's a global issue, not a China issue.

JULIE HYMAN: Interesting. Paul Gruenwald, it's always good to see you. Be well, Paul. Paul is the S&P--

PAUL GRUENWALD: Likewise to all of you.

JULIE HYMAN: --Global Ratings Global Chief Economist. Thank you.