Federal Reserve Chairman Jerome Powell testifies during a House committee hearing in June. Tasos Katopodis/AP
In an interview on Friday with NPR's Steve Inskeep, Federal Reserve Board Chairman Jerome Powell took questions about the current financial crisis, income inequality and about economic recovery.
Steve Inskeep: I want to begin with your Jackson Hole announcement. I was trying to think of some way to summarize in my own words what you were telling me or telling us. And one thing that I came up with is you're saying you're going to worry less about the economy overheating. If inflation gets a little high, if employment gets a little high, you're going to be less quick to stamp on it. Is that a fair summary?
Jerome Powell: Yes, it is. In fact, what we've learned is that unemployment can be even lower than we thought and not result in troubling levels of inflation. So we saw that, for the last couple of years before the pandemic arrived. We had 3.5% unemployment, which was sort of the lowest period of sustained unemployment in 50 years. And we didn't see inflation result. Now, if you go back 50 years, inflation would have reacted very strongly to low levels of unemployment. So we saw that it didn't. I mean, the underlying point here is that the economy's ever-evolving and the Fed has to have a framework for reacting to changes in the economy. And this was, this process that resulted in my Jackson Hole speech, was a way of updating our monetary policy framework, our strategy, to today's economic realities.
[At this point in the interview, there were technical difficulties. The issue was resolved and the interview resumed.]
Where did inflation go? Why is it going away?
So, low and declining inflation has been a phenomenon really around the world for the last few decades. And it comes from a couple of factors. One just is that with globalization, things can be made anywhere, and that means it's difficult to raise wages or prices. So if you raise wage costs or prices, someone will find a cheaper place in the world to make a product or increasingly to deliver a service. And all of that is enabled by advancing technology. That's what has enabled globalization. So those factors are just very important in establishing a mindset where prices and wages don't go up. I mean, both wage and price inflation are a bit of a mental phenomenon. If people believe that prices will be pretty stable, then they will be — because they won't ask for very high wage increases and people who sell things won't be asking for high price increases. So, once that psychology sets in, it tends to perpetuate itself.
I can see why low wages would be seen as a problem. Why is a lack of inflation a potential problem?
So, we all know that high inflation can be a problem. And I'm old enough to remember when it was a serious problem in the 1970s. And [former Federal Reserve] Chairman [Paul] Volcker at the Fed and his colleagues managed to get it under control. But persistently low inflation can be a problem, too. And this is less obvious and intuitive. And the reason is really this: When inflation is very, very low, it means lower interest rates. For example, in every interest rate is built in, whether we know it or not, an expectation of what inflation will be. And if people expect inflation to be very low, then interest rates will keep going down. Again, we've seen this around the world, lower and lower interest rates, lower and lower inflation. When interest rates get very low, the Fed will have less room to cut interest rates to support the economy. That means that unemployment will be higher, more of the time. It means less attractive economic outcomes. And those burdens tend to fall most on those who are least able to bear them. So we really want some inflation. We want inflation to be around 2%. And that's where that's sort of the global standard these days is 2% inflation. We don't want inflation to slide down closer to zero, which frankly is happening many places in the world. And it's not a good feature of an economy when that happens, for the reasons I gave.
One of your predecessors in this office famously said, 'My job is to take away the punch bowl just as the party starts heating up.' So is your solution to keep the punch bowl out a little while longer?
I guess I would say it a little bit differently. So in that world of 40 and 50 years ago, high inflation was the problem that we all talked about. And the difficulty in solving it, and would we ever get it under control? And again, the people who bore those burdens were those least able to bear them, as well. So what happened is Paul Volcker stepped up and really did get it under control. Alan Greenspan, as the next Fed chair, consolidated those gains. And since then, high inflation has really not been a problem in the United States. It's been more than 25 years since we had as high as 3% inflation for a year. And inflation, remember, was 10% in the 70s. So inflation — high inflation — has not been a problem in the United States. It's a different economy. The challenges have changed. The challenge now is how to get to full employment, how to keep us close to full employment. And part of the way we need to do that is to keep inflation at 2%. And most of the time we're going to be pushing up rather than down.
This means that you can keep interest rates super low for a little longer time or maybe a lot longer than you might otherwise have done. Is that what we should expect? The interest rates are going to be around zero for years to come?
Well, I think that's really a function of the unique situation we're in right now. As you know, the economy was in strong shape before the pandemic arrived. And March and April of this year, because of the pandemic and the measures we took to control it, the economy — economic activity — declined pretty significantly. So the economy is now recovering and it's about half of the jobs, the 22 million payroll jobs that we lost during that period have come back. But it's going to be a long time, we think. We think that the economy's going to need low interest rates, which support economic activity for an extended period of time, and —
Years.
It will be measured in years, yes, we believe. However long it takes, we're going to be there. We're not going to prematurely withdraw the support that we think the economy needs. So there's still, while we've gotten something like 11 million people back to work, there's still another 10 or 11 [million] who are not back to work. And in a sense, those may be some of the harder jobs to find because there are some parts of the economy that will take longer to recover. And these are the ones that involve direct person-to-person contact in crowds. So travel, entertainment, hotels, things like that. It's going to be hard. The people who worked in those service jobs, particularly the entry-level, lower paid workers, they're the ones who are most vulnerable, you know, and those are the ones who we really need to look out for both through Fed policy, which will be there to support the economy, but also through fiscal policy, where by fiscal policy, I mean things like enhanced unemployment insurance and aid for small businesses and things like that. And we think it will be some time before that set of problems can work itself out, and get those people back to work and then the support can be withdrawn.
I'm glad you note that so many people are still unemployed. The speed of the recovery appears to be slowing. Do you agree that it's slowing? And does that call for some change on your part?
I don't know that it is slowing. I would say today's jobs report was a good one. Through May and June, we got quite a few people back to work. I'd say that the recovery is ongoing. It may be continuing at about the same pace. I think we're not really going to know the pace of the speed of the recovery with any clarity for a couple more months. But certainly the healing in the jobs market continues apace. Today's jobs report, unemployment rate declined to 8.4%. More than a million jobs were created. Again, that's not as many as were created in May and June, but that's because more and more people are going back to work. So I guess I would just say the recovery is continuing. We do think it will get harder from here — because of those areas of the economy that are so directly affected by the pandemic still. The places where, you know, flying in airplanes and things like that, where still economic activity is going to be very low. There's going to be a long period, we believe, where we'll have to take our time and see those people get back to work.
How do the risks to the economy and the economic risk to ordinary people change now that we're about six months into this pandemic in the United States and infection rates are still quite high and the end is not quite in sight?
So the key thing for the economic recovery and also just in general is to get the spread of the disease well and truly under control. And that was always going to be very important in supporting, as rapid as possible, a reopening, a sustainable reopening of the economy. So we did see this summer, when there was a wider spread of the virus in some southern and western states, we did see some indicators suggesting that people had — that the rate of improvement had slowed. But there's still significant improvement, as you can see from today's labor report.
The rate of improvement of the economy?
In the economy, yes. So certainly to get us back to full employment, we're going to need to get the spread of the disease under control. And the best way to do that, short of arriving at a vaccine, is to take these social-distancing measures and employ them. And that means masks, that means keeping your distance and things like that. Those things actually enable people to go back to work and not get sick. So it's really important that we do those things. And I mean, there's actually enormous economic gains to be had nationwide from people wearing masks and keeping their distance.
Congress is now debating, as you know very well, further steps because the first few trillion dollars only went so far. Do you need to take further steps at the Fed knowing what you do about how the pandemic has evolved over the last six months?
So, I think it's likely that we will need to over time. I think we took very aggressive action, historically aggressive action, at the very beginning of the pandemic. And that has put us in good stead. I think we are in a situation where financial conditions have not tightened. Where what was a, you know, a health crisis did not turn into a financial crisis. The banking system held up well, markets are functioning. And by functioning, I just mean borrowers can borrow or lenders can lend. Markets are pricing in the risks of doing various things. That's a functioning market. We're not trying to — we're not focused on the price level of any particular asset. So I think we — you know, we've done many things. We've done a lot of the things we can do, but we can do more and we will do them as we see the need for that.
Looking from the outside, some people are baffled by the performance of the stock market, which seems to have done relatively well in all this time of economic pain. Does the level of the stock market give you pause?
So we don't really comment on or have a view on the particular level of the stock market. We're focused on —
You're not going to tell me there's irrational exuberance then, I suppose?
No, no, no. I would say that we focus on broader financial conditions, by which I mean the availability of credit, the level of interest rates, equity prices matter, too. All of those things really matter for the economy. So healthy financial conditions enable businesses to borrow, they enable people to borrow, to roll over their debt, to buy houses, to buy cars. So, that's what we're really focused on. We're focused on — what Congress has assigned us is maximum employment and stable prices. Those are our two statutory goals. And we work to achieve those through financial conditions. So we really want healthy financial conditions. But we're not focused on, again, any particular asset price.
Although, I think, as a layman about the super low interest rates that we now can see extending quite far into the future, one practical effect of that is that somebody with some money can't put it in the bank and expect it to grow because the savings interest rate will be very low. And so they have to put it in the stock market. Are very low interest rates contributing to some kind of bubble in the markets?
You know, the connection between low interest rates and sort of excessive exuberance in the financial markets is not as tight as you might think. So interest rates are low for a reason. As I mentioned at the beginning, the sort of equilibrium, the general level of interest rates has declined steadily for more than 40 years. And the reason is, you know, there's some economics behind what sets an interest rate. There's a real return and there's an expectation about inflation in every interest rate. So if you go back and look at the U.S. Treasury, it would have been yielding 5 or 6% 40 years ago. And now the 10 year treasury is yielding less than 1%. And now why is that? And one of the reasons is that people expect inflation to be much lower. And also the level of savings that people as the population has aged, they create a lot of savings. And when people invest, that means they drive down interest rates. So that also means lower interest rates. So a big part of why interest rates are low is nothing to do with the Fed. It's just that interest rates generally are much lower all over the world. And to that extent, there's no reason why that would lead to, you know, excessive asset prices, for example, in stocks.
You don't think that that hypothesis would be what's happening?
I think, I'm just saying that the connection between low interest rates and financial instability generally is not as tight as many people would think. I don't want to comment on the level of the stock market. That's just something we don't do.
How much do you ask if your policies contribute in any way to income inequality?
So we have quite a focus on inequality. And inequality is a feature of the U.S. economy that's been growing for some time. And so there's been quite a lot of research done, much of it here. We do see it as an important feature of the economy and one that holds the economy back — because you want prosperity to be as broad as possible. But if you look back at where U.S. inequality began to increase, compared to other countries, it goes back more than four decades. And there are a lot of — there's a ton of research asking the question "why?" I think part of it is just the sort of relative plateauing of U.S. educational attainment, beginning in the 1970s, compared to other countries, compared with evolving technology. So people who don't have advanced skills now have less ability to profit from the technology that is everywhere in our economy. And so what happens is their incomes stagnate. And if you have those abilities, if you can benefit from globalization and advancing technology, your income has probably gone up a lot. And not just at the high end. It's gone up a lot. I looked at since I graduated from college and right up at the top quartile, people have done extremely well during that period. But at the bottom they've been pretty stagnant. And part of it just is that educational attainment has put those people — lack of it, of increasing educational attainment — has put some people in a position of not being able to benefit, not being able to use that technology in their work to gain the benefits that technology provides, which is rising productivity and rising incomes. So that's the big driver. It isn't — and that's long before the Fed cut rates to zero in, you know, 2009. It's not really a function of — the long-run trend in the United States economy about inequality is not about Fed policy or interest rates. It's about much more fundamental factors than that.
Has the pandemic driven inequality?
Yes, absolutely. Well, I would put it this way. The burdens of the pandemic have fallen to a greater extent on people at the low end of the income spectrum. And that's people who worked in the service industry in relatively low-paid jobs, dealing with the public, for example, in restaurants, in bars, in hotels, in airlines, in entertainment. Those people have tended to be, you know, have lower wages, be more skewed to minorities and more skewed to women. And to a very large extent, that's where the job losses have been and where the burdens have fallen. So I would say, without question, this event has exacerbated really preexisting disparities in our economy that were already troubling, which is one of the reasons, one of many reasons, we're so eager to get back to the economy, get back to a tight labor market with low unemployment, high labor force participation, rising wages, all of the virtuous factors that we had as recently as last winter.
Do you feel you know how to get there other than the pandemic ending?
I really am optimistic and confident that we will get there. The question is, how do we get there as fast as possible. Part of it is just getting the virus under control, part of it is getting a vaccine so that people will confidently re-engage in the activities they were engaging in or similar activities. But we'll get there, it just is a question of how fast. And the sooner we get the virus under control, the more people take it upon themselves to help with the project of getting the virus under control, the faster we'll get back to a labor market that benefits all Americans.
Are partisan politics adding to the risk to the economy?
I shouldn't comment on that. You know, we do monetary policy here. We do it without taking political considerations into effect. And I try not to comment directly on political things on a theory that we'll be left alone to do our monetary policy.
But I'm just thinking Congress either does or doesn't pass a relief package. Either way, that affects what you need to do here, doesn't it?
Yes, we certainly take that into account. I should say, though, that Congress passed the, you know, a $2 trillion relief package earlier in the year. And that's part of the reason why you see the amount of recovery we have seen with half of the people who lost their jobs now having gone back to work. Part of that is the support that Congress provided in the CARES Act, which was historically large. It's far larger than any package that's ever passed the Congress, and it came quicker. So Congress did respond very strongly. I sense that there's — you can see that there is pretty widespread agreement on both sides of the aisle that something needs to be done. I guess there are differences, it appears, as to what needs to be done and how big it needs to be —
Extending unemployment, for example?
But those sorts of things are for Congress to decide. But I do think there's agreement that something needs to get done. And my guess is that, in time, more will be done. And certainly I think more will be needed.
When you think about people at the bottom end of the scale, people who are disproportionately harmed, as you were saying, does something need to be done to prevent mass evictions, for example, in the next few months?
So I think those — the people who probably aren't going to have a lot of savings and didn't have high income — and they may be renters and things like that — they're very vulnerable to an extended period of unemployment. And we shouldn't allow them, in my view, as a country, we shouldn't let those people lose everything they have and have to move out or be evicted and move in with family. That's also not going to be good for containing the COVID spread. So I do think we ought to do everything we can as a country to keep those people — I won't say make them whole, but I would say to look out for them. It could have significant macroeconomic effects over time. But it's also just the right thing to do.
Is there something in your power that would influence that?
Not really, no. Our powers involve, you know, interest rates and things that affect the economy quite broadly. We do not have those authorities. You know, we're an independent agency and we have protections that allow us to make our decisions without political interference. And the other side of that is we need to stick to the authorities we got. We don't give Congress advice and we try to stick to what Congress has asked us to do.
Let me ask about the trillions that have been expended that have been lent by this institution that have been borrowed by the Congress in recent months. At the time of the financial crisis, when trillions were also borrowed, I recall experts saying, "This is something we can afford. This is something we can do. We just need to make sure we don't do it again any time soon."It hasn't been that long, and we've done it again. What do you think about that?
Well, I think that the COVID shock is — it's not something that came from our economy, right? It came from — it's a pandemic, it's a natural disaster. And I'm not commenting on the way it's been handled or anything. I'm just saying the nature of the shock, the nature of the prior shock in the global financial crisis, you can trace that to weaknesses in our banking system, weaknesses in financial regulation, to a housing bubble, imbalances in the economy. There's really nothing like that here. This was an economy with a strong banking system, low unemployment, low inflation. There was no part of the economy that was booming and therefore needed to bust or could bust. It's a natural disaster. And so I think our response should be — no one caused this. There's no guilty party to look up and punish here in terms of the, you know, the disease. And so I think it really does behoove us as a country, as a very wealthy country, to use our great powers to support people who did nothing wrong. And it'll be temporary. I really do believe we'll be back to a good economy. It's really a question of how fast, but it shouldn't take you know, it shouldn't take an extremely long period of time to do that.
Granting that interest rates, as we've been discussing, are going to be super low for a while, you don't have to worry that much about borrowing a lot of money. You still have to think about it. At what point would the United States have borrowed too much?
So this is a fiscal policy question, and it's not really for the Fed, but I would say that the U.S. fiscal policy at the federal level has been on an unsustainable path for some time. And by that what I mean is the debt is growing faster than the economy. By definition, that is unsustainable. Eventually, that can't go on. And the time to deal with that is when the economy is healthy, when there's growth, when unemployment is low, when people can afford to pay taxes and we can control spending. That's the time to deal with that. The time to start working on fiscal sustainability is not right now when we have so many people in need. In fact, now, to the extent you can keep people in the workforce, keep them in their houses, they're going to be able to contribute more to the economy and they're going to be paying taxes. And it's going to be, you know, you'll have a stronger, faster growing, more resilient economy coming out of it if you do keep these people connected to the economy. It'll cost money now, but it will pay dividends later.
Are you anywhere near the limit in the liquidity that you can provide, the bonds you can buy, the loans you can make?
No, there really — as a practical matter, we're limited by our mandate. We can only do things that support our mandate. But we can provide the liquidity as needed. And by the way, the situation regarding liquidity has very substantially improved. You know, you mentioned trillions of — we set out to make available trillions of dollars of loans. The Fed did. But the uptake has — just the fact that we were there and willing to make those loans has meant that the capital markets and the lending resumed on its own because we were there as a backstop. So the actual lending that we've done, to state and local governments, to private businesses has been far smaller than we said we were willing to lend.
Explain that for the layman. A business wants to borrow, they know you are going to help that business in an emergency, or rather, the bank knows you're going to help that business in an emergency. So they will lend to the business?
Yeah, so let me go back and explain why we'd be doing that in the first place. The Fed would ordinarily have no role in lending to regular way non-financial companies. And the reason we did was that the whole lending system in the country broke down and wasn't working and just stopped. And so we have these emergency powers, which we can only use with the Treasury secretary's authority, to come in and set up loans under particular circumstances. And we said we would do that. And what happened was as soon as we said we are available to do that we created these facilities that you've been reading about and made these loans available. What happened is the private market started working again, which is just as it should be, and started making those loans. This is not 100% successful, but very largely successful in reopening the capital markets to companies that have access to the capital markets. Smaller companies don't. And so there's still some questions about credit availability for smaller companies. And those are quite important in our economy. But nonetheless, the amount of loans that we've actually made turns out to be much less than we had presented ourselves and been ready to make.
Mr. Chairman, thanks very much.
Thank you.
Scott Horsley, NPR's chief economics correspondent: Briefly, when you and your colleagues met in June, the forecast was that unemployment at the end of the last quarter would be north of 9%. We're at 8.4% as of this morning's report. As you say, though, the pace of job growth has been slow and the low hanging fruits have been picked now, some of that fiscal support's dried up. I mean, are we better than where you thought we'd be or are we about where you thought we'd be? What should we expect going forward?
Jerome Powell: So 8.4% unemployment at the end of August is better than most people's expectations if you go back 90 days. At that time, too — there was so much we didn't know. The level of uncertainty, which, frankly, is always high, about the future of the economy, but it's so high now that we just didn't know. There was really the possibility of a much slower recovery, of, you know, of the recovery not going very well at all. That hasn't happened. We seem to be living, you know, a case that is a positive case where you actually see economic activity continuing. It continued through the outbreak in the South and the West this summer. And the signs you would think — with the failure to extend the CARES Act — you would think you'd see some slowing. There may be a modest slowing in the pace of improvement, but improvement goes on. And in the labor market, I would say, it goes on, you know, at least at the at the pace that we've expected.
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