The Trend Rider: May 2020

60 Minutes Excerpt
Jerome Powell (Federal Reserve Chairman)
Scott Pelley (60 Minutes)

PELLEY: Do you think history will look back on this time and call this the Second Great Depression?

POWELL: No, I don't. I don't think that's a likely outcome at all. There're some very fundamental differences. The first is that the cause here-- we had a very healthy economy two months ago. And this is an outside event, it is a natural disaster, in effect. And that's one big difference. In the '20s when the Depression, well, when the crash happened and all that, the financial system really failed. Here, our financial system is strong has been able to withstand this. And we spent ten years strengthening it after the last crisis. So that's a big difference. In addition, the last thing I'll say is that the government response in the '30s, the central banks were trying to raise interest rates to keep us on the gold standard all around the world. Exactly the opposite of what needed to be done.

In this case, you have governments around the world and central banks around the world responding with great force and very quickly. And staying at it. So I think all of those things point to what will be -- it's going to be a very sharp downturn. It should be a much shorter downturn than you would associate with the 1930s.
...
PELLEY: In terms of the workforce, Mr. Chairman, who is getting hurt the worst by this downturn?

POWELL: The people who're getting hurt the worst are the most recently hired, the lowest paid people. It's women to an extraordinary extent. We're actually releasing a report tomorrow that shows that, of the people who were working in February who were making less than $40,000 per year, almost 40% have lost their jobs in the last month or so. Extraordinary statistic. So that's who's really bearing the brunt of this.

PELLEY: The people who can afford it the least are being hurt the worst?

POWELL: That's right
…
POWELL: So the thing about the Fed is -- the Fed is an institution, it's a great American institution. And it's full of highly capable people, many of whom are now in senior leadership positions, who were here during the financial crisis. So those people have seen what happened in the last serious crisis. And they were here to help.

So we got together and we thought about things to do. And we just did that around the clock for a period of about four weeks -- of just putting old programs back into play, inventing new programs, intervening in various markets, just to assure that the markets are functioning.

PELLEY: Fair to say you simply flooded the system with money?

POWELL: Yes. We did. That's another way to think about it. We did.

PELLEY: Where does it come from? Do you just print it?

POWELL: We print it digitally.
...
PELLEY: In terms of size, Mr. Chairman, how does what the Fed is doing right now compare to the unprecedented action it took in 2008?

POWELL: So the things we're doing now are substantially larger.
…
POWELL: ...I will say this. If we keep doing the right things in government, we keep providing support to businesses and to households and to the unemployed, if we do that and if we're thoughtful and careful about how we reopen the economy so that people take these social distancing measures forward and try to do what we can not to have another outbreak -- if we do all those things, then the recovery can begin fairly soon. And it can be a robust one. It probably will take some time to gather momentum, but we can get into a recovery. And that's the main thing, is to get into a recovery and then do the things we need to do to keep it going and get people back to work.
…
PELLEY: What we're seeing is the federal government borrowing trillions, upon trillions of dollars to try to dig us out of this hole. How long can that go on?

POWELL: Well, if you take a longer perspective, the U.S. has been spending more than it's been taking in for some time. And that's something we're going to have to deal with. The time to deal with that, the time to get on a sustainable fiscal path, which really just means that the economy is growing faster than the debt, and that means you've got to control the growth of the debt -- the time to do that is when the economy is strong. When unemployment is low, when economic activity is high, that's when you deal with that problem. This is not the time to prioritize that concern.

The United States is the world's reserve currency. The dollar is the world's reserve currency. And we have the ability to borrow at low rates. We have the ability to service that debt. And I would say this is the time when we can use that strength to our longer run benefit. It is true that deficits are going to be big for a couple of years here. And that we'll have to deal with that. The time to deal with that though is when we're through this recovery.

Again, this is an economic shock that's different and bigger than any in our lifetime. But it's not from inside the economy. It's from outside the economy. And so it doesn't say anything bad about our economy. We can get back to a healthy economy fairly quickly. And the spending that we're doing to support people and businesses will help us do that.
…
PELLEY: What is the danger to the budgets of states and local governments?

POWELL: State and local governments are seeing much lower tax revenue and fee revenue. Many of them get fees from things like transit fees, which have to do with airports and mass transit and things like that. So they're seeing a sharp decline in revenue.

There's quite a lot of budget pressure there. And state and local governments provide many of the critical services that people rely on. Safety -- public safety, fire, police, things like that. So it's a tough time in state and local governments. So that's one of the reasons why we've created a facility to lend money to them, to get them through this period of low revenue.
…
PELLEY: In the early days of the crisis in this boardroom, you and the committee lowered interest rates essentially to zero. Would you lower them further into negative territory, which the president has suggested is a good idea?

POWELL: So around this table during the last crisis and during the recovery, we looked at negative interest rates. And it's something we decided not to do. We used other tools instead. And those tools involved forward guidance about the federal funds rate and also lots of asset purchases or quantitative easing as it's often referred to.

I continue to think, and my colleagues on the Federal Open Market Committee continue to think that negative interest rates is probably not an appropriate or useful policy for us here in the United States.

PELLEY: And why not? The President seems to think it would help.

POWELL: The evidence on whether it helps is quite mixed. And the issue is people would be depositing money in the bank and that money would be shrinking. They'd be paying interest to put their money in the bank. So it's not a particularly popular policy, as you can imagine.

But in addition, it can also tend to depress the profitability of banks, which makes them likely to lend less, which weighs on economic growth. So I would just say it's not at all settled in, you know, in economic analysis that negative rates really add much value.

PELLEY: I think the idea of negative interest rates is something that a lot of people have a difficult time getting their head around. Would you explain it to me?

POWELL: Well, rather than being paid interest on your cash, you pay interest to the bank -- or if you borrow money, they pay you to borrow money. And if you lend them money by putting it in a bank, then they pay you money.

PELLEY: So the banks would pay people to borrow money, essentially?

POWELL: Yes.

PELLEY: And that would conceivably cause more business and commerce to happen?

POWELL: It would. But, you know, this has been tried. We have negative policy rates in many countries around the world as a result of the financial crisis. And there's no clear finding that it actually does support economic activity on net. And it introduces distortions into the financial system, which I think offset that.

There're plenty of people who think negative interest rates are a good policy. But we don't really think so at the Federal Reserve. And I think it's an area of real uncertainty in the central banking world.
…
PELLEY: If the economy reopens and the infection rate surges, what then?

POWELL: Well, the risk would be that you would have to reintroduce, the government would have to reintroduce, the social distancing measures. And that you would have another downturn. And that would be bad for confidence. So that's a risk we really want to avoid. And I think we can avoid.
…
PELLEY: Has the Fed done all it can do?

POWELL: Well, there's a lot more we can do. We've done what we can as we go. But I will say that we're not out of ammunition by a long shot. No, there's really no limit to what we can do with these lending programs that we have. So there's a lot more we can do to support the economy, and we're committed to doing everything we can as long as we need to.

PELLEY: What would the Fed's next steps be, potentially?

POWELL: Well, to begin, the one thing we can certainly do is we can enlarge our existing lending programs. We can start new lending programs if need be. We can do that. There are things we can do in monetary policy. There are a number of dimensions where we can move to make policy even more accommodative. Through forward guidance, we can change our asset purchase strategy. There are just a lot of things that we can do.