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The slippery slope towards higher inflation is not as slippery as many thought: Economist

Joseph Minarik, The Conference Board Chief Policy Economist and Former OMB Chief Economist, joins Yahoo Finance’s Zack Guzman to discuss the Fed's new inflation strategy.

Video Transcript

ZACK GUZMAN: Broaden this conversation out a bit with our next guest. Joseph Minarik is the Conference Board chief policy economist and former OMB chief economist as well. Mr. Minarik, I mean, we were just hearing that description of this new policy. And I mean, we know the trade-off here has been well documented. Econ 101, you can go back and look at the trade-off between inflation and unemployment.

And obviously, we had been running below the Fed's inflation target regardless, even as we saw unemployment down at 3.5% before this pandemic hit. So what's your take on maybe this, as Brian said, giving the Fed the freedom here to let inflation maybe run a little bit hotter and reinforcing that belief out there that they're to tell people, that they're not even close to raising rates right now?

JOSEPH MINARIK: I do think that reinforcing the point that the Fed is looking at a long run of low interest rates to try to stimulate the economy is a part of the message that they're sending. What's in the background, though, as well-- and I think Brian is alluding to this-- there is a sense, fairly broadly across the economics profession and certainly at the Federal Reserve, that we are in an environment of intense competition.

There's a lot of productive capacity around the world. We're going to be going for some time with very, very low inflation because of that. And as a result, the Fed sees-- you know, we talked about the Phillips Curve, the tradeoff between unemployment and inflation. In a simpler simile, the slippery slope towards higher inflation is not as slippery as many people thought. And as a result, the Fed believes that they can err on the side of more stimulation of the economy, lower interest rates, faster economic growth and not face a substantial penalty, in terms of higher inflation. And they want to take advantage of that.

BRIAN CHEUNG: Hey Joe, it's Brian Cheung here. So I guess I just wanted to ask as an extension of that, you've had a lot of experience on the fiscal policy side of things at the Office of Management and Budget. So with the Federal Reserve effectively saying today it's going to keep interest rates at the zero bound for quite a long time, what should the interpretation of that be from fiscal policymakers, especially during a time right now where there's been calls to be doing more fiscal stimulus to support households, support businesses that are really troubled during this time?

JOSEPH MINARIK: Well, it was not a point of Chairman Powell's presentation today, but he has-- and his fellow governors have spoken in the past few weeks about the need for a fiscal response to the current weakness in the economy. The phrase that Chairman Powell used is we can lend, but we can't spend. He made the point with some frequency that if the Fed makes credit available to businesses, that does not rule out the possibility that those businesses cannot operate over the longer term with additional liabilities. So the Fed is limited in what it can do to try to get the economy going more rapidly.

In my experience, I never saw anything like this, but-- you're too young, Brian. But if your memory went back far enough, you would think about the late 1990s when there was a great deal of controversy about the Federal Reserve holding interest rates lower than some people thought was justified on the ground that a highly-competitive economy with a lot of investment and an improvement in productivity was not going to drive prices higher. And in fact, it turned out that that low interest rate strategy worked very well for quite some time. And we're in an environment now where--


JOSEPH MINARIK: --those forces holding inflation down are really compounded and are quite powerful. And that, I think, is what Chairman Powell is resting his case on today.

BRIAN CHEUNG: And you're right. I wasn't around during that time, although I feel like I've aged 90 years just during the last year or so. But I did want to ask, as an extension that, if the Federal Reserve has its hands tied behind its back, as you've kind of illustrated, does that increase the onus that, in future downturns, it's really going to be on fiscal policymakers to be, you know, putting in these counteractive, I guess, policies to get the economy back up? Will the Federal Reserve effectively have less tools in the next downturn?

JOSEPH MINARIK: The Fed will have weaker tools. Chairman Powell did make the point of saying that the Federal Reserve would use everything in its tool box if it were called upon to do so. So we have the whole range of tools, in terms of quantitative easing. We have the lending facilities that they have created. But clearly, if you were within the range where changes in the federal funds rate would give you enough leverage on the economy, you'd feel a lot more comfortable. So at least in terms of degree, we are going to be leaning more on fiscal policy for the next few years because of the weakness in the economy.

ZACK GUZMAN: The problem there too, though, just to tie this conversation back to what we're seeing play out in this crisis and how it's different than what we saw play out in the great financial crisis here is that, you know, the Fed's kind of limited in supporting the problems that we're seeing right now, when we talk about millions of Americans losing their jobs. And right now, to Washington DC, we did hear the update there that Mark Meadows said he had reached out to house Speaker Pelosi, but it doesn't seem like any progress to restart talks is coming through here.

So as we see this drag on-- I mean, we've got the uptick on the unemployment front, another 1 million in initial claims here, Mr. Minarik. What's your take on how this crisis continues to drag on here and we're not seeing additional stimulus come out of DC, what that means for this nascent recovery as, you know, the Fed can sit there and say, look, it's time for, you know, monetary to take a backseat in this approach to solving the situation. But if nothing else is getting done, how risky is it in this recovery?

JOSEPH MINARIK: I believe there is significant risk. There are a lot of entities in this economy, obviously, that are credit constrained, that do not have access to finance to keep them going until things begin to move again. There are going to be businesses that are going to go under. There are going to be households that are not going to be able to pay the rent. There are going to be kids who are hungry.

We have some serious problems there. I believe that the pressure is mounting on our fiscal decision-makers, including members of Congress who are looking at the election around the corner. And for most of them, there are going to be people out there in their constituencies who are hurting and who are going to be wondering when there is going to be a response to their needs.

The two sides are obviously at loggerheads. The demands on the Democratic side are a longer list than those on the Republican side, but the Republican side has some of its needs that are different-- some of its political needs that are different from those on the Democratic side. At the end of the day, we're going to have to have enough pressure from those folks who are seeking re-election to get an agreement, to have something from column A and something from column B put together--


JOSEPH MINARIK: --to the point where they can agree. And the Fed, I think, and policymakers really now are pretty much saying the same thing. The danger right now is not doing too much to help this economy. It's doing too little. And those two voices, I think, are joining in something of a chorus to push for action at this particular juncture.

ZACK GUZMAN: And right now, it's hard to imagine one doing anything less would look like here, as we continue to wait for a fourth phase to come through. But Joseph Minarik, Conference Board chief policy economist and our own Brian Cheung, appreciate you both for joining us in that.