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Yellen Says Fed Is Pleading for Fiscal Relief

Nov.16 -- Former Federal Reserve Chair Janet Yellen and former U.S. Treasury Secretary Lawrence H. Summers, who is also a Bloomberg Wall Street Week contributor, talk about how central banks have responded to the Covid pandemic. They speak to Bloomberg's Stephanie Flanders at the Bloomberg New Economy Forum.

Video Transcript

JANET YELLEN: The notion that the Fed can do all that is required at this point to support the economy is just wrong. And the Fed is really pleading for fiscal relief. I believe it's essential. I think the Fed has been less successful in lending to smaller businesses.

That creates an impression of unfairness, that the Fed is on the side of big companies and on Wall Street. This is something that's very difficult to accomplish, but you know, as Chair Powell says, the Fed can't spend, it can't give grants, it can't direct aid to where it's needed, to unemployed workers. And fiscal policy has a very important role to play now, as well.

STEPHANIE FLANDERS: Larry Summers, let's take [INAUDIBLE] if we take from the other three speakers, quite a lot has gone right in the major central banks' response, but what would you have done differently?

LAWRENCE SUMMERS: Look, the big thing what is preventing a financial collapse. The central banks acted definitively to do that. That's all that was ultimately, historically, important. The mistake is for them to vastly exaggerate their continuing relevance. They lack, starting at the zero bound where we are, the capacity to provide meaningful impetus to their economies in any way that is consistent with any concept of central bank functioning.

They do not have the capacity to meaningfully affect the degree of inequality. They do not have the capacity to vaccinate people. They do not have the capacity to fight climate change. And they need to acknowledge the limitations of their influence in a clear way so there can be no pretending about what they're going to do, and that the authorities have the responsibilities they do.

The central banks have also, in my view, not put adequate emphasis on the global dimensions of this problem. A striking feature of the contrast between this crisis and the last crisis is that the last crisis had a major response from the IMF, issuance of SDRs, big increases in lending from the World Bank that was driven by the global community.

There has been no boldness at the global level comparable to the boldness at the national level. And that could get us in real trouble down the road, as [? Raghu ?] points out. And frankly, the central bankers, because they want to curry domestic political favor in each country, have not had enough to say about that.

STEPHANIE FLANDERS: Janet Yellen, do you agree that maybe the Fed shouldn't be talking about needing to target the difference between Black and white unemployment rates, for example, as it did in this summer, and shouldn't be engaging on these broader agendas, climate change?

JANET YELLEN: So the Fed has always operated under a dual mandate. It's inflation and maximum employment. And in this environment of very low inflation, too low inflation, there's really no conflict whatever between these two goals, and the Fed is really focused on trying to create a very strong job market. And I think that they have made that clear.

I'm not sure everyone in the public on Main Street understands that, but full employment is a goal that they ought to pursue. I agree with Larry that the effective lower bound is a big constraint. At this point, they're doing almost all they can do. They need fiscal policy to help.

But when they talk about inequality and the disproportionate burdens on minority workers, what they can do is to try to pursue the strongest possible job market, because when they're successful at that, as they were prior to the pandemic, with unemployment at a 50-year low at 3.5%, that brings benefits particularly to less skilled and minority workers.