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COVID-19 to have a more 'fundamental and long term' impact on economic activity: Fmr. Fed Governor

The University of Chicago Booth School of Business Deputy Dean and Professor of Economics and Former Governor of the Federal Reserve Randall Kroszner joins the On the Move panel to discuss the Federal Reserve's latest decision.

Video Transcript

ADAM SHAPIRO: OK, we're watching markets right now and just want to give you an update on what's happening with the sell-off. And it's not a huge sell off, but look, we've got the Dow off about 80 points. I'm checking the monitor off to the right. The S&P 500 is off about 30 points. NASDAQ is down about 160 points. Crude oil, by the way, crude is above $40.91 futures WTI this morning. All of this coming after yesterday's statement from Jay Powell and of course the Fed's FOMC statement basically saying interest rates are going to stay near zero until, what, 2023, but leaving open how far is the fed willing to go with inflation. And Julie, that seems to have upset at least some people.

JULIE HYMAN: Well, and there's also the idea of why they're keeping rates low for so long, right? They talked about, Jay Powell talked about uncertainty in the underlying economy, and certainly that is an issue as well, Adam.

ADAM SHAPIRO: And we've got Randall Kroszner. He is the University of Chicago Booth School of Business Deputy Dean and Professor of Economics and also a Former Governor on the Federal Reserve's Board to help us understand what that statement really was saying and what Jay Powell was telling us. What do you make of it, Randall?

RANDALL KROSZNER: So I think, you know, obviously, they've got a new framework, and they're really trying to convey that, you know, they said they wanted to keep rates low for a long time. They're going to keep a low for a long time, even if inflation starts to go above their traditional 2% target, and they say it can go moderately above for some time. Now, we don't know exactly what moderate means. We don't know exactly what some time means, but it's clearly signaling that they're going to let inflation go above their target in a way that they had never signaled before.

JULIE HYMAN: What's incredible, of course, about this statement is inflation is not going above their target right now, right?


And it doesn't look like it necessarily will in the foreseeable future. Some of the economic data we've been watching has indeed been improving, particularly in the housing market, we continue to see strong numbers there. Some improvement in the jobs market, but when are we going to see inflation of over 2% nonetheless, I mean, let alone for any kind of sustainable period?

RANDALL KROSZNER: No, and this is one of the challenges, because I think it's a sensible monetary policy framework, but you're asking the totally relevant practical question, OK, that's fine if we get there, but how do we get there? And I think, so monetary economists and central bankers think if you talk about it that way, people will believe that you really want to have more inflation, and we will have more inflation. I sometimes call that faith-based monetary policy. I'm not so sure that just the words are going to do it. I think we need some deeds. We also need to see stronger economic activity in order to get there. I don't think these words alone will do it.

ADAM SHAPIRO: Correct me when I get it wrong, as I often do, but I don't think we've had 2% inflation really in, what, 12 years? And what I wanted to ask you was is it time or would it be dangerous to reexamine the mandate that the Fed has? Should we remove the inflation mandate from its directive?

RANDALL KROSZNER: Well, I'm not sure that's a sensible approach. I mean, certainly, everything should be on the table, and you should be able to ask any questions, and Congress often does ask these sorts of questions about what the Fed should be doing. But I think it makes sense to have a broad inflation mandate, I'm just not so sure that it makes much difference to say we have a 2% target versus we'll go moderately above 2% for some time. If you really wanted to jolt things, you'd really have to change that target. I'm not sure anyone in Washington would really have a stomach for doing something like that. I'm not sure would be wise to do something like that. But if you really wanted to move the needle, I think that's what you'd have to do.

DAN HOWLEY: Randall, it's Dan. I just kind of want to ask something a little more selfish sort of. I guess as far as interest rates go, you know, we've heard that they're going to be a near zero perhaps until 2023. I guess, what does that mean then for housing loans? Are we going to see them kind of remain at the super, super low rates that we're seeing now for some time? And then does that mean I get to wait on buying a house?


RANDALL KROSZNER: Well, I'm not going to give you advice on when to buy your house, but I think it does mean that you do have the luxury of waiting a bit if you're looking, and you want to take advantage of those low rates. Because I think what the Fed is trying to convey is that they, as much as they can possibly do, will keep rates low for two, three, perhaps even more years than that. Now, of course, circumstances could change. Maybe the economy will come back more strongly than the Fed is expecting or that I'm expecting, and so then rates can go up. So you don't want to wait forever, but I do think that rates are going to stay low in the housing market for quite some time.

JULIA LA ROCHE: Hi, Randall. It's Julia La Roche. You're just kind of referencing that, you know, what the economy and what the comeback could look like. I would like to dig in on that with you, because obviously, we are going to have more bankruptcies coming down the pike. We're going to see some jobs are probably not going to come back period or jobs will change. How are you kind of thinking of the evolution of the economy, the jobs market and what a recovery could look like, and if we need to make some fundamental changes here?

RANDALL KROSZNER: I think that's a very important question, because I was in Washington both when 9/11 happened and during the global financial crisis. And I actually think that the shock of COVID-19 is going to have a more fundamental and long-run impact on the structure of economic activity than either of those two other of those two shocks, because consumer behavior I think is going to change over the long run. Even if there's a vaccine, it's going to take a while for people to be vaccinated. You're not going to be certain that everyone is vaccinated.

People have gotten used to not using as much transportation staying at home and working from home. So I think there's going to be a very big change, both in terms of sectors, like so the hospitality sectors, some of the transportation sectors, as well as geographically. I'm right now very close to our campus in London. And so right in the heart of the city of London, very few workers have come back. They're staying at home.

And so there's also a rebalancing of economic activity from the central city to the outer parts of cities and into the suburbs, so jobs will be in different locations. It will be different kinds of jobs. That's not something that's just going to happen overnight to have those transitions. It's going to be a long slog, and I think that's what the Fed is sort of preparing for.

JULIA LA ROCHE: I hear you on that that it's going to be long. I just also want to follow on and ask, we often hear about, you know, the different shapes or letters for recovery. Right now, the one that is tossed around is the K-shaped recovery. What do you make of that, and do you think that-- what do you think is going to happen in terms of inequality, especially if it is a long path forward, and we have these structural changes and the potential that many folks who could continue to be left behind here?

RANDALL KROSZNER: Yeah, well, given them my last name is Kroszner with a K, I'm always partial to anything that has a K in it. But I do think that it raises some real challenges, because I think you're exactly right. If you think back to kind of structural changes that I was talking about in the economy, a lot of the higher paying jobs are ones that people can work from home more easily. So as I said, I'm sitting here in the city of London where there are a lot of finance jobs. So many of those jobs can be done remotely as long as one has a good internet connection.

But if you're working in some of the shops that would typically sell goods or services to the people who would normally be coming into the city, those are typically lower paying jobs, and you can't do this from home. Those jobs aren't coming back. People aren't coming in, and so I think it's a real challenge for workers who are doing those kinds of jobs, and that's going to take a while. People need to both potentially move to different parts of countries where there are going to be jobs as well as different skill sets. That's tough.

ADAM SHAPIRO: And on that, we say thank you, Randall Kroszner, the University of Chicago Booth School of Business Deputy Dean and Professor of Economics, as well as a Former Governor of the Federal Reserve. We'll be right back.