Don’t Bet on a Quick Recovery

Federal Reserve Bank of San Francisco building

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COMMENTARY | The president of the Federal Reserve Bank of San Francisco discusses the pandemic, the diversity crisis in economics, and monetary policy.

As financial markets seized up and economic activity halted in the face of the coronavirus pandemic, the Federal Reserve took unprecedented action: It dropped interest rates to zero, bought billions of dollars of government debt, and set up an alphabet soup of emergency facilities to pump liquidity into the financial system. In some ways, that was the easy part. The central bank is tasked with keeping inflation in check and helping the economy achieve full employment. The country is now facing the most severe jobs crisis in 90 years, and the worst-off families are the hardest hit.

Mary Daly is the president of the Federal Reserve Bank of San Francisco. (She does not sit on the Fed panel that sets the country’s interest rates, but will next year.) As a labor economist and a policy maker, she has been vocal about using the tools of government to address financial inequality, and about the “diversity crisis” in economics.

We discussed this unusual recession, the limits of monetary policy, and representation at the Fed. This interview has been lightly edited for clarity and length.

Annie Lowrey: Early June brought some glimmers of hope that we might have a more V-shaped recovery. Employment and consumer-spending data seemed to show a strong rebound. Are you optimistic?

Mary Daly: I don’t see a V-shaped recovery. What I see is, as people are allowed to come out of their homes, some reengagement in economic activity.

People are going out because they’ve been sheltering for almost three months. They’re going out and putting a toe in the water. But they’re watching the news as well, and they may see COVID-19 cases spike, or continue to increase in some areas. We just don’t know yet how much persistent confidence we’re going to see in these communities. That will largely be determined by the virus and how much we have been able to mitigate its spread.

I wouldn’t be immediately jumping to evidence of a V-shaped recovery. Just to add to that, I’m not hearing from any of my contacts that a V-shaped recovery is what is before us. Some were holding out hope. But that hope has gone. And now people are looking for a recovery that is slow, but steady.

Lowrey: What do you see as the biggest risks weighing on economic activity as the economy reopens?

Daly: It’s the virus. We don’t know enough about the virus to accurately forecast with any confidence what’s going to happen.

My biggest concerns, right at the top: These pauses we’ve put in place—you’ve heard about forbearances on loans—ultimately, if we ask businesses to stay out of production for too long, these turn into insolvencies. Persistent pain. We’re all interconnected, so as these insolvencies emerge, then job losses that were thought to be temporary become permanent. Individuals are now dislocated and have to get back into the labor market.

The virus will determine a lot of it. But those are the two outcomes that I worry the most about: persistent job losses and persistent business failures.

Lowrey: Given that uncertainty, it seems like stimulus, whether it is monetary or fiscal, is not going to work in the way it might normally work. Stimulus doesn’t work against a virus. How do you make policy to fight a virus?

Daly: A shock came to our shores. Coronavirus is, first and foremost, a public-health crisis. And that’s how we responded to it. What do we need to do to ensure that we can continue to be healthy? We shelter in place. And we cannot stimulate the economy when we, for public-health reasons, have been asked to stay at home and not engage in economic activity.

That puts the government in a position of providing emergency relief: We’re trying to build a bridge over the coronavirus, so that people can make it through the coronavirus and be best positioned to reengage in economic activity when the virus is safely behind us. That is different from the things the government normally does.

I always have these things simultaneously in my mind: Do we need a longer bridge? If we build a longer bridge, what would it look like? And once we’re through with the coronavirus, how do we have faster growth, but also more inclusive growth? At the end of the expansion, we were really pushing on inclusive growth.

Lowrey: In this recession, the pain has been borne disproportionately by younger workers, and by black and Latinx workers. As a policy maker, how do you address that?

Daly: The impact of COVID-19, and this is true in health and economic terms, has fallen hardest on those who are least able to bear it. They just don’t have the cushion. They don’t have the resources saved up. This is true for people of color, communities of color, younger workers, workers with less than a high-school education or [at most] a high-school education. They’ve all been dramatically affected.

The thing that is really important, if you’re coming from a policy-maker perspective, is that we recognize that these disruptions were no fault of these individuals and that returning them fully back into the labor force and into economic life is our responsibility. That’s our No. 1 priority in my judgment. We can’t leave these workers behind and have it take another decade for us to get them back into the labor force and back into economic life and back into more economic security.

We need to commit to a maximum-employment mandate that is inclusive. That is not just about a fraction of our workforce coming back to employment, but [the idea that] every American who wants a job, gets a job.

Lowrey: What does that mean for Fed policy now? What does it mean for Fed policy to focus on the bottom half or quarter of the income spectrum?

Daly: When I think about this, I think about really achieving both of our dual-mandate goals of price stability and full employment.

We had not been able to achieve our inflation goal in the last expansion. We just grazed it. We never sustainably achieved it. We have room on the inflation front—that’s been shown. The lesson I take from that is we need to really work to get employment to its maximum level, especially with inflation so well under control.

We have the ability to be accommodative, to stimulate the economy once we’re past the virus. And to return us to a place where employers take a second look at individuals who have been structurally disadvantaged for decades.

Lowrey: What do you make of the calls to have the Fed target the black unemployment rate, as a tool for targeting full employment?

Daly: When we think about maximum employment, I think it’s a misnomer that we target an unemployment rate at all.

It’s one of the great lessons from the financial crisis is that it is incomplete to simply look at unemployment. I would say: Let’s be broader than that. Let’s look at labor-force participation. Let’s look at the employment-to-population ratio. Let’s look at wage growth.

Lowrey: You and some of your colleagues have highlighted the good that could come from not raising interest rates when the unemployment rate is low, but inflation is not rising. Before, you might have seen policy makers hike the interest rate to cool the economy off because of concern about asset bubbles, for instance.

Annie Lowrey is a staff writer at The Atlantic, where she covers economic policy.

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