As Co-Head of Global Economics and Chief U.S. Economist at NatWest Markets, Michelle Girard regularly shares her market insights with colleagues and customers - as well as followers of CNBC, Bloomberg Television, and other financial media outlets. Girard recently took time to speak with RMA Director of Global Markets Risk Fran Garritt about recent Federal Reserve action, the data revolution, trade wars, and where it all may lead.
GARRITT: Since I am talking with an economist who regularly makes the TV rounds explaining the developments of the day, I have to start with this question: What will be some long- and short-term effects of the Fed’s decision to reverse course and return to reducing the federal funds rate?
GIRARD: I’m often asked, why should the Fed lower interest rates? It isn’t as if the level of interest rates is the problem. If the Fed cuts rates by 25 or 50 basis points, will it really have any economic effect? And even if it does, the impact will be relatively limited. While I understand that argument, the Fed’s action sends an important message - that policymakers are providing accommodation to offset downside economic risks. We’ve seen a significant shift in the Fed’s posture since the beginning of the year when officials talked about rate hikes. Now the Fed is cutting rates. The Fed believes this shift has provided much economic support beyond just a 25 bps reduction in rates. And I agree. If the Fed does not cut rates further, the decline we’ve seen in market yields would vanish. So perhaps it isn’t about how effective the rate cuts will be in boosting growth, but rather what would happen if the Fed didn’t cut rates and markets priced in a less accommodative Fed? That might lead to weaker growth. In this way, even limited Fed action can be important in keeping the economy on an expansion path. That said, there was disappointment in the market following the Fed’s quarter- percent cut on July 31. [Editor’s Note: The Federal Open Market Committee (FOMC) was scheduled to decide on another possible rate adjustment at its meeting on Sept. 18.] Market participants were hoping that the Fed would act more aggressively. Given the escalation of the trade war and weaker U.S. manufacturing data, there is growing concern over the economic outlook. This concern has been driving up Treasury prices, and driving down Treasury yields. Markets are priced for more rate cuts. As of early September, the Fed’s message was similar to what it was at the July FOMC meeting: Policymakers will monitor the situation and do what is necessary to sustain the expansion. Still, Fed officials don’t sound predisposed to acting aggressively and taking rates a lot lower than has been signaled.
Since the spring, our view has been that the Fed would cut rates twice this year, which is what the Fed signaled in June. But given recent developments, it’s looking increasingly likely the Fed will have to cut rates further to cushion the economy from the downside risk associated with the trade war.
The question now for markets is whether this Fed action will just be insurance cuts [to stave off a recession] or turn into a more extended easing cycle, with rates continuing to be cut into 2020. The jury is still out on this question. It may depend on how long the trade war lasts and how severe it gets.
GARRITT: On the flip side, if the trade war were to end tomorrow, what would the effect on markets be?
GIRARD: Even if there were to be a speedy resolution, I am concerned that lingering uncertainty over a future flare-up would cause businesses to remain cautious. This is a concern I’ve had since May, when we saw the president un- expectedly threaten tariffs on Mexico, even though an agreement on trade with Mexico and Canada had been reached and was awaiting approval in Congress. The dispute with Mexico was resolved relatively quickly, but these events highlighted that, under Trump, trade policy can be changed at any time. And this overhanging uncertainty might keep businesses cautious about committing to capital spending or hiring. In August, we heard that talks between the U.S. and China had been productive; the next day the president tweeted that new tariffs on Chinese goods would be enacted on September 1. [President Trump later announced a delay on some consumer-related products to December 15 to limit effects on the holiday shopping season.] Un- certainty around future trade policy will have a lingering negative effect. Even if there were an immediate resolution, which we don’t anticipate, I wouldn’t expect businesses to quickly re-engage in terms of capital spending and hiring.
GARRITT: But would you see a bounce in equity markets?
GIRARD: There’s no question you would see a relief rally if the trade war with China was ended. Companies would re-engage to some extent in any activity they had put off while there was an open question about the tariffs. But stepping back, the question to ask is, how resilient is the economy likely to be? In particular, will capital spending be as strong as it would have been if we didn’t have the risk of a potential trade flare-up at any time? I think that ongoing uncertainty will cost us something in terms of GDP growth.
GARRITT: I have to think China’s retaliatory efforts on agriculture aren’t as easily unwound either.
GIRARD: The further you go, the harder it is to unwind, to take back the threats. That said, at any point both countries could reach an agreement. Both sides understand it is in the best interest to avoid a full-blown trade war. And both countries are being hurt by it. Despite the rhetoric being ratcheted up and new tariffs being instituted, all of this can be quickly unwound. At the moment, China probably feels time is on their side because of the 2020 U.S. presidential election. But China is more economically vulnerable than the U.S. Right now it is about assessing when one or both sides will decide enough is enough. At some point, both countries might decide they are better off striking some deal, even if it’s not a good deal, to provide relief. But when that may happen is unknown. As an economist, I try to base my forecast on what I expect rational actors to do. That doesn’t necessarily define the current situation.
GARRITT: What do you think the effect of the trade war will be?
GIRARD: Many are focused on the impact of the trade war in terms of higher inflation caused by tariffs. I am not as worried about the immediate impact on inflation, because I am skeptical that businesses will be able to pass the higher costs of tariffs on to consumers. If companies are unable to raise their prices, then the impact of tariffs won’t be on inflation but rather on corporate profits and, with more of a lag, on economic growth. Imagine a scenario where tariffs are implemented and companies cannot pass the cost of the tariffs on to consumers. In this case, profits margins are squeezed and profits come under pressure which, in turn, forces companies to cut back on capital spending and hiring. As the labor market softens, confidence declines and consumer spending cools. The impact might not be seen in one month or quarter. It may take longer for the negative impact to feed through the economy. So even if we don’t see an immediate impact from higher tariffs, we shouldn’t assume there we won’t be an effect. The impact may be more of a slow burn that is felt in 2020—coming through the business sector and then to the consumer—rather than just higher consumer prices in 2019. In other words, my concern is that the tariffs are not a 2019 inflation story but rather a 2020 growth story.
GARRITT: How does the comparative value of currencies, which has become a factor, play into this?
GIRARD: With the yuan, there are different angles. To the extent the yuan weakens and the dollar strengthens, it puts downward pressure on commodity prices and on inflation. Fed officials have made clear that a shortfall in inflation below its mandated level is as much a factor in the decision to cut interest rates as the downside risks to growth. Even in an environment where the labor market is tight and we are seeing somewhat faster wage growth, inflation is still not at the Fed’s 2% target. A strong dollar will only add downward pressure on inflation. On the flip side, the yuan’s weakness mitigates somewhat the impact of the tariffs on U.S. consumers, as some of the cost increase due to the tariff is offset by the currency move, lessening the impact on U.S. businesses and consumers. We see different angles here in terms of how the currency moves play into the trade war and the Fed debate.
GARRITT: Speaking of Fed debate, I understand that you are using some interesting technology at NatWest Markets to get a feel for what future actions the Fed might take.
GIRARD: I have spent some time working with our technology team to utilize natural language processing in analyzing “Fed speak”— Federal Reserve speeches, FOMC statements and minutes—to gain insight into future Fed policy actions. For example, does certain language show the FOMC is be- coming more dovish? More hawkish? We’re trying to use technology to gain new insights into this information.
GARRITT: How exactly does it work? Could you feed information on “Fed speak” from past years into the system, along with in- formation on how that language did or did not match with subsequent Fed actions?
GIRARD: Ultimately, that’s our goal. But remember, Fed transparency has been an evolving trend. In the 1980s and 1990s [under former Chair Alan Greenspan], Fed officials communicated far less about their policy decisions or outlook, so we don’t have the luxury of being able to go back decades to look at the cause and effect. But even being able to look at information from the post-crisis period, when the Fed was more transparent, is helpful.
GARRITT: What are some other technology projects you and Natwest Markets have worked on in the last year?
GIRARD: Our chief information officer and I collaborate on technology projects that will benefit the business as a whole. A lot of this work is around knowing our clients better so we can serve them more effectively. Pulling data from different parts of the organization to get a better sense of who our customers are, what they’re looking for, and what’s important to them can help to shape the information we provide. We want to understand the subjects our clients are interested in, the topics that are relevant to the trades they are looking at or positions they hold. For instance, if we know customers are interested in the shape of the yield curve, then we can prioritize writing strategy pieces on that topic.
GARRITT: How do you ensure that you effectively communicate economic data to your audience?
GIRARD: I spend a lot of time thinking about how I communicate my thoughts because I am often deep in statistics that may be of very little interest to the general population. I need to be able to communicate my findings and predictions in a succinct way that can be understood by a variety of audiences. Speak- ing to a hedge fund manager is different than presenting at a conference or appearing on TV. Especially when I’m doing a TV interview, I try to speak as if I were explaining it to my grandmother because I want everyone to understand, even those who don’t follow the financial markets that closely.
You could be the most brilliant economist in the world, but if no one understands what you’re trying to say, then you’re not going to be effective. Also, attention spans are limited when it comes to listening to an economist, so I know I need to pick and choose carefully the information I provide. I’ll only have my audience for so long.
GARRITT: What are some global trends that could shape the world economy in the next 10 years?
GIRARD: Demographics and income inequality in particular are trends that will have implications worldwide. Income inequality is going to be exacerbated by technological advancements. As countries look to address income inequality, we may continue to see de-globalization. Also we may see more activist government policies to try to correct income inequality that benefit individuals more than markets or companies, with implications for economic growth as well.
Also, around the world, we’re seeing aging populations and shrinking workforces, which means global economies will have slower potential growth rates. These demographic trends will create economic head- winds over the next 10 or 20+ years.
GARRITT: Changes in demographics, of course, affect the financial services industry as much as any sector. To develop new leaders, institutions and the industry must have access to a deep talent pool that is diverse in terms of backgrounds and gender. How does the Women’s Network at NatWest Markets advance this effort?
GIRARD: We relaunched our women’s network in the U.S. in 2016. Seven of us senior women formed a steering committee to decide the network’s mission and focus. In doing so, we considered the needs of the women in our organization and of the bank. We believed talent development was most important—making sure women in our organization had the skills and confidence to take advantage of opportunities presented.
"I never wanted my gender to be an issue. I thought of myself as an economist first. I never went into meetings and noticed whether or not I was the only woman in the room. If asked, I would have said being a woman was an advantage."
We made a conscious decision to stay away from what are often seen as women’s issues—for example, flexibility in the workplace and work-life balance – since we viewed those issues as not being gender-specific. Instead, we wanted to focus on providing women the skills they needed to advance in their careers. We came up with a talent development program for senior women to give them the skills to ultimately move into even more senior roles. Our programs have been expanded and are now available to women at all stages of their career. We also felt strongly that women needed the support of other women so, as steering committee members, we made it known that we were willing to meet with anyone in the organization who wanted to discuss career development. I think our approachability was a significant factor behind the success of our network.
We also had incredible sponsorship from the CEO of our region and the entire management team. All of this came together in a very positive way and the success we have had with our U.S. Women’s Network has inspired our London and Singapore offices to re-launch their own networks.
GARRITT: Do you feel the economist field is male dominated? Did that play a part in your involvement in the Women’s Network?
GIRARD: To be honest, before 2016, I had no interest and no involvement in any women’s initiatives. I never wanted my gender to be an issue. I thought of myself as an economist first. I never went into meetings and noticed whether or not I was the only woman in the room. If asked, I would have said being a woman was an advantage. Since I never wanted my gender to be an issue, I generally stayed away from these types of programs. But when I was approached to join the steering committee and re-launch our Women’s Network, I felt that, being a senior woman in the region, I had a responsibility to do so. Not everyone has the positive experiences I had. And it was important to me to help others as they worked their way through their careers.
GARRITT: Was the intent of U.S. Women’s Network to help create a gender-balanced organization?
GIRARD: Let me be clear, not one of us believes that a woman should get a job just because she’s a woman. Our in- tent was to make sure women have the confidence and the skills they need to raise their hand and take advantage of opportunities that present themselves, which they may not have done had they not gone through some of the development programs we set up.
We also recognize that development programs tailored to women can be even more impactful because there are things that women tend to do that could inhibit their professional growth more than men. For this rea- son, gender-specific trainings can be really effective.
As organizations look to attract, retain, and promote women, programs such as ours—that allow women to form bonds with other women and gain the training they need—are increasingly important. Programs like this can also help keep women in the organization longer—helping women get through difficult periods when they may think about leaving the workforce because of the challenges they face. That’s when it can be important to have a support system of women who have been through it. I talk to many women who are facing the challenge of trying to balance family and career. I say to them, “I understand where you are. I was there too. But know that this is only a small period of time and you can get through it.” I tell them to take it one year at a time. “Just do what you need to do to make it work for now. In another year, you will be in a different place.”
Anyway, I am really proud of the work we have done at NatWest Markets and the impact our Women’s Net- work has had on our business. The fact that it’s been replicated in other regions is a testament to what we’ve been able to accomplish here.
GARRITT: You mentioned training that is specific to women and some things that women may do that undermine their careers. Can you give us some examples?
GIRARD: Women won’t necessarily pursue an opportunity unless they feel almost overqualified for the position. A woman will read a job opening with 10 requirements. She checks off only eight of them and decides she can’t possibly apply. Whereas a man checks off two and thinks, “I’m perfect for this job.”
Whenever this anecdote comes up in our development programs, all the women nod. Women tend to want to exceed expectations— to over-deliver—and sometimes that works against us because, the truth is, sometimes just being good is good enough. Women may hold themselves back from pursuing opportunities because they think they cannot over-deliver on day one. But I think they’re holding themselves to too high a standard.
Also, women generally find it more difficult to make people aware of their accomplishments. They don’t want to brag. They may not champion their success to the ex- tent they should. They assume that if they just sit and do their jobs, their accomplishments and successes automatically will be recognized, which isn’t necessarily true.
GARRITT: How important is networking?
GIRARD: I can’t stress the importance of networking enough. Don’t sit at your desk with your head down all day doing your work. Take time to get up, grab a coffee with someone, to build your internal and external network, even if it means taking more time to complete some other task or having to be more selective in the number of tasks you complete. It’s just as important to spend some time networking.
GARRITT: Do you have experience as a mentor or mentee? If so, can you share what you have learned?
GIRARD: Having mentors early in my career was certainly impactful. And now, at this “advanced” stage in my career, I have the opportunity to men- tor those who are in the early stages of their professional journey. The two most important qualities that I think played a role in my career were having confidence and being resilient. The times in my career when I made the greatest professional advancements came during periods of transition within my organization. I spend a lot of time with my men- tees emphasizing the importance of feeling confident to take risks, and to use periods of change to take on more opportunities—and also the importance of having the resilience during those times. Because periods of challenge and change are just a natural part of everyone’s journey.
Also, I make sure my mentees take the time to think about where they’re trying to get to. Where do they see themselves in three or five years? What are they hoping to accomplish in their careers? We all get bogged down in the “busy-ness” of our day-to-day jobs. I encourage my mentees to step back and think about the bigger picture of where they want to be.
I’ll ask them—with no blinders on—if you could do anything and be successful at it, what job would you want? I think it’s important to identify the roles you might want so that you know the direction you want to be heading and you make sure you are gaining the skills you will need along the way. I always encourage my mentees to be forward- looking when thinking about their careers. Some of the most beneficial conversations I have had with my mentors were when they asked me the question, “Where do you want to be in five years?”
Another point I’d like to make is this: When my mentees are struggling in a position or within an organization, I’ll ask what they enjoy most about their work and what they’d like to be doing. Often if people are struggling, there’s some sort of mismatch between their current role and their skills or interests. Identifying what aspects of a job a person is most successful at or most interested in can help to identify different opportunities—perhaps another position within the organization or maybe even in a different industry—where they can really thrive. The most important thing is to be passionate about what you do. When we’re passionate about what we’re doing, we don’t mind working hard to succeed, and we don’t mind taking advice and constantly finding ways to improve.
© 2019 The Risk Management Association. All rights reserved. Reproduced with permission.