Mary Daly, president of the Federal Reserve Bank of San Francisco, spoke with Yahoo Finance by phone on March 31 to share her thoughts on the central bank’s unprecedented approach to helping the U.S. economy weather the coronavirus-related disruption.
Below is a transcript of her appearance:
BRIAN CHEUNG: We have the privilege of having with us right now San Francisco Fed President Mary Daly on the phone to chat with us a little bit about it. Are you there?
MARY DALY: I am. Thank you for having me.
BRIAN CHEUNG: Thanks for having us. So I wanted to chat with you a little about your district. For those that aren't aware, the Federal Reserve has 12 different districts across the country carved out in different regions. So your region covers nine states, the entire west coast. You heard about San Francisco, LA, Seattle, I'm wondering based on the contacts and the conversations you’ve had, what has been the effect of the coronavirus in your district and the economic conditions in the 12th district?
MARY DALY: It's what we have been hearing in the news nationally. It was a hard stop on economic activity. We were among the first states to be affected. You mentioned Seattle, San Francisco, LA, and the leadership in those areas basically went to shelter in place pretty quickly.
So we have this hard stop on economic activity that has now been compounded by the fact that this is broad-based. It's across the globe and travel, international and domestic, has come to a halt. Tourism-dependent industries are now not working at all. Retail is not working at all unless you are a grocer or a pharmacist. And this has had a very big impact on our communities with literally millions of people losing their jobs.
This is similar to what we are seeing in the United States and I expect it to get a little bit worse as we do the right thing and shelter in place, before it gets better.
BRIAN CHEUNG: President Daly, we've had a number of estimates, it's hard to estimate right now, but questions about whether or not we are already in a recession or headed into one and to what degree and how deep that recession is going to be? First of all, is that your baseline forecast? Secondly, do you have any sort of projection on unemployment or where GDP might be for the U.S.?
MARY DALY: So one thing that we all have to face is that the virus and its evolution will determine both the magnitude of the downturn and its duration. So predictions become very, very challenging to make.
What we do know for sure is that if we're not already in the recession right now, we will be and I expect we already are. You can't have millions of people losing their jobs and tens of thousands of workers being furloughed for an indefinite period without tipping the economy into a downtown.
The duration of that downtown will of course be affected by the evolution of the virus. What we know from other studies and pandemics, is that if we do the right thing and shelter in place and curb the spread of the virus, the economy will be in the best position to bounce back. So that's where I'm putting all of my efforts is: shelter in place, do the right thing, shore up, try to build a bridge for American families and households and businesses across the coronavirus and put the economy in the best position to rebound once the virus has cleared.
BRIAN CHEUNG: So the federal government has really come into view with that big bill that was passed last week signed by President Trump. They would appropriate $454 billion to the Fed and the Treasury for a number of lending facilities. The Fed has already telegraphed its intention to open up a Main Street lending facility. I’m wondering, based on the conversations you have had, what might it look like or is it undergoing the works right now? What would you like it to look like?
MARY DALY: It is undergoing the works, the Board of Governors is working hard on this, the entire staff is across the entire system is working furiously trying to put up the various facilities we’ve announced to see what else we may need to treat. Let me backup from a particular facility and talk about the overarching principles.
There is an alphabet soup of facilities. Seven if you are counting. What they are all meant to do though is to provide liquidity in credit markets, financial markets that are strained. We are trying to work on the plumbing. What we are finding with each of these new facilities that we announce, is that this is going to be another crack of the financial system that we need to fill and ensure that those markets have the liquidity they need to be able to do the basic lending and borrowing that is required so those are the- that's why we are doing this.
If you think of a Main Street facility, that's meant to compliment the fiscal stimulus or the fiscal emergency act that was put into place, the $2 trillion act that said we're going to target directly small businesses with SBA lending. They already have facilities helping big corporations through capital markets. But there is this whole swath of institutions that don't access capital markets very easily and don’t qualify for small business lending.
So if you think about, that's a part of Main Street that still needs to be treated and directly employs millions of workers in the United States.
BRIAN CHEUNG: Now, with regards to addressing that, what other tools does the Fed have in its toolkit right now to do that? The Fed has described its actions as being aggressive. Does the Fed have the ability to be even more aggressive, can you see the Fed asking for Congressional authority per se to buy longer-dated corporate bonds, muni bonds? How aggressive can the Fed get from here?
MARY DALY: I want to go back to something I said earlier. The virus will determine the timeline that we have. But it will also determine the amount of action we have to take. These are unprecedented times and they call for unprecedented action. We’ve already taken unprecedented actions and I wouldn’t want to say we would never do something or we’ll definitely do something because we're dependent on the evolution of a virus, which we don't control other than to listen to our public health officials. So the main thing I want to convey to your listeners is the Federal Reserve is prepared to do whatever it takes within our powers to ensure that we are a part of a solution of shoring up people over the virus, shoring up the American economy and putting us in the best position to grow again once the virus recedes.
ZACK GUZMAN: President Daly it’s Zack Guzman here I just wanted to jump in with a question in regards to the powers you afforded yourself. It's interesting you go back to the left vote you participated in, in December 2018. That was the vote that actually raised the target range of the federal funds raise to 2.25% to 2.5%. Of course, the president has been very critical, others have been very critical about maybe potentially that being too fast, too quickly back then. But now looking back in hindsight, it had given you guys the ground to work with when we think about that first 50 basis point emergency cut that kind of kicked this all of this off and as you noted the seven lending facilities since then. But just that first room to move lower in hindsight, looking back, do you think that was critical enough to give you guys enough space to work with to kind of get this kick-started here?
MARY DALY: So I'm of the mind that you need as much policy room as you can by ensuring that inflation achieves it’s 2% target and we achieve full employment. And I think we accomplished that we had the interest rates set at the right level to allow us to achieve our dual mandate goals which were given to us by Congress. And put the economy on a solid footing so I’d rather talk about: we had the economy on solid footing, rather than do we have the right amount of space, policy space. Because ultimately the policy rate gets set to ensure that the economy ensures its dual mandate goal.
The good news from my vantage point is and what makes me optimistic that if we shore American households up and help businesses get through the virus, we will be well-positioned going forward. What gives me hope is we were on a solid footing, a very solid footing, with a very strong economy, eleventh year of an expansion, before the coronavirus.
Then we get this massive shock, a pandemic, that affects everyone simultaneously. It's better to have been on a good footing when that happens than on a weaker footing. That will give us the best opportunity once the virus recedes to continue to grow and to expand again and get American households and families back to work.
BRIAN CHEUNG: Another question I guess on that point is, what more the government can do to make sure there is the opportunity out there for people to get back into jobs. One of them has maybe been infrastructure. With the Fed having slashed rates to zero, you heard the president tweet this morning saying that he thinks now is the time for stimulus in the form of infrastructure. He said that in a tweet this morning. I’m wondering, do you think that more spending should be done now? How does monetary policy create the fiscal space to try to counteract the economic impact of the virus?
MARY DALY: Well, what monetary policy does and- it's a really good lesson in what the Fed's responsibilities are, which are both given to us by Congress. We were given these responsibilities by Congress. We are set to achieve our dual mandate goals by moving interest rates and policies in order to stimulate the economy to get there.
We’re also tasked with being the lender of last resort, and that is consistent with all the facilities we've opened. So what the infrastructure and other discussions rely on is the fact that we have cut interest rates to near-zero. And that's in an effort to support the economy during the coronavirus. And then add stimulus to the economy once the virus has passed us.
And if we choose to spend as a society on things like infrastructure, I personally have been a proponent of that in previous remarks well before the coronavirus. And building our physical infrastructure and our human capital infrastructure through education are the two best ways to ensure we can grow faster going forward. I think that argument is as sound today as it was six months ago.
ZACK GUZMAN: Yeah, President Daly, I think you are one of the better Fed guests we can have today as we talk about this, so much of your research had been focused on the labor market in terms of all the research you worked on the years prior. Looking at it, infrastructure spending there is a lot concern about the delay in terms of having people who might be out of work right now as we got the jobless claims numbers last week. Who might be out of work right now and wonder how long that delay might be, how would you look at maybe an infrastructure spending bill versus other things that could be done on the fiscal side in addition to all the leverage you guys are pulling from the monetary side to make sure we do get a recovery as soon as quickly as possible here?
MARY DALY: With these questions, I personally find it helpful to break things into the three buckets of effort we have to make as a society and the Federal Reserve plays a role in that.
The three buckets are, the first order of business is the public health. We have to follow the guidance from public health officials, spend resources on public health to ensure that we get the coronavirus under control, treat the really hundreds of thousands of people affected by the virus and ensure that more people aren't affected. That's priority number 1.
Priority number 2, in my judgment, is we have to think about shoring people up, during this time, when the very thing we've asked them to do, we've asked the American people everywhere to shelter in place. So they're doing the right thing. It's the public servant's commitment and responsibility to ensure that we shore them up as much as we can during this period. So that doing the right thing doesn't wreck your livelihood. That's priority number two.
Priority number 3, this is where the infrastructure spending and other things come in, and the Fed's commitment to keep interest rates accommodative until we achieve our real mandate goals. That's about what do we do once the virus subsides and how do we get Americans back to work. If people have been displaced, if jobs have been lost. How do we get those individuals back into the labor market so that they can take care of their families and participate in their communities.
BRIAN CHEUNG: President Daly, wrapping up. There is a lot of nervousness out there and you actually addressed this in a video address a few days back. You have conversations with businesses, people in your district all the time. I'm just wondering if you can peel back the curtain and give us a little insight into what you are telling them right now through this time? What are you re-assuring them in terms of what the Fed is doing and what do you have to say broadly to the American people wondering how we are going to get out of this economic rut?
MARY DALY: I tell my businesses, my community, my employees, and I'd like to tell the American people: we are doing exactly what you would want from us, as public servants, in my judgment.
The Federal Reserve alone can't solve these problems. the federal government and local governments alone can't solve these problems. It takes all of us, and the passage of the- all of us are working towards the same goal. And the passage of the stimulus in Congress and the president's signature, the Federal Reserve taking these unprecedented actions, I actually see this as we are taking unprecedented actions in an unprecedented time.
And the thing I want to leave the American people with, is while these actions are unprecedented, we're not unpracticed at them. We know how to do them. It's just the scale is so much more vast. So that's why you see every day something new coming out, some new method to treat these problems, it's just to treat the scale of the problem. We actually know how to do this, and I think we have demonstrated as a collective we are actively doing it.
ZACK GUZMAN: All right. There you go: San Francisco Fed President Mary Daly, thank you so much for joining us and taking the time to chat with us today.
MARY DALY: Thank you, my pleasure.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.