Odd Lots - Minneapolis Fed President Neel Kashkari On The Historic Challenges For Monetary Policy

Episode Date: August 31, 2020

The Fed is facing historic challenges for two reasons. The first is the coronavirus and the task of facilitating the economic recovery. The second challenge is one that precedes the crisis, and it has to do with how the Fed operates generally as well as the limits of effective monetary policy. How can the Fed better achieve its goals? Can monetary policy spread the benefits of growth more broadly? How can it avoid snuffing out growth prematurely? On this week’s episode, we’re joined by Minneapolis Fed President Neel Kashkari, who is thinking about all of these things and more.See omnystudio.com/listener for privacy information.

I'm June Grasso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world. Listen for complete analysis of the biggest court cases, the latest actions from Congress and regulators, and the legal moves driving the markets, from corporate law to constitutional law, and from state courts to the Supreme Court. At Bloomberg Law, we go beyond the day's headlines. We speak with top attorneys, judges, scholars and policy experts to break down what the rulings really mean. We do this every weekday,

then bring you the best conversations in our daily podcast. Search for Bloomberg Law on YouTube, Apple, Spotify, or anywhere else you listen. On the East Coast, listen as you start your day, and on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso. Subscribe today wherever you get your podcast. And welcome to another episode of the Oddlots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. Tracy, if it weren't for the coronavirus, this would be the week of a pretty important sort of gathering of the brightest minds in monetary policy, federal reserve, central banking all around the world. That's kind of a big if, isn't it?

Like, if it weren't for everything that threw 2020 into disarray, this other thing would be. important. But yes, it is Jackson Hole Week. And Jackson Hole Week is traditionally when the sort of luminaries of economics gather to talk about the issues that are most pressing to them from an academic perspective and also from a real economy perspective. And it's usually the time when we have lots of interesting discussions, lots of interesting speeches coming out from policymakers, and lots of interesting academic papers as well. Right. And so today we are recording this on Wednesday, August 26th. So by the time people hear today's interview, the Jackson Hole event, it's actually still happening, but it's just happening digitally,

sort of like all meetings are happening these days. But yes, this is the week of the famous Kansas City Fed Monetary Policy Symposium. And I think it comes at an extremely important and interesting time for the Fed and for the economy and monetary policy. Yeah, absolutely. So there are two things I think that are really important this week. And one is sort of short term. And that's just the whole coronavirus induced economic crisis and the policy response to it. So clearly that's going to be up for debate and discussion at Jackson Hole this year. But the other one is a more long term development, which is that the Federal Reserve is rethinking its inflation targeting framework. So we could get something very interesting. out of the Fed this week. Yeah, that's exactly what I was thinking. It's like the two things happening at once. And I would actually even say it's beyond just the rethinking of the specific approach to monetary policy. And it's part of this even preceding coronavirus, there was this sort of rethinking of the role of monetary policy, the limits of monetary policy, the economic costs of overreliance

on monetary policy, what monetary policy actually does. So we really are in this moment where a sort of medium or short-term economic situation is coinciding with a much sort of like bigger, deeper, deeper discussion that was already building to a head. Yeah, absolutely. And the two are sort of feeding off of each other. So it's a very interesting moment in time, as you point out. So I am extremely excited about today's interview. It should be extremely special because we're going to be speaking to an actual active

top fed official today. our guest is well known. He is the president of the Minneapolis Federal Reserve. He is also known during the last crisis when he was on the Treasury side, when he was involved with the workings of the TARP program. So public figure for a long time, now on the monetary policy side, really interesting thinker. Neil Keshkari is joining us, so we're going to be talking about the intersection of all these different things. So Neil, Thank you very much for joining us. Thank you, Joe and Tracy.

Thanks for having me. Let's just start off with actually just this moment in time. And I'm curious, like, you know, the unemployment rate is back down to just over 10%. A lot of economic indicators have actually held up surprisingly well given the devastation. There's actually arguably V-shaped recovery and housing. Auto is doing well. Retail sales doing well. Have you been surprised by the strength of the economic data that we've seen so far?

I think it cuts both ways. I mean, yes, in some sense, the economy has bounced back, but I think that's because we've reopened more quickly than the health experts recommended. And so, yes, it's great. I mean, I want to put Americans back to work as quickly as possible. But if in doing so, we allow the virus to flare back up again and to start raging, continuing to rage across the country, then it seems like it's going to be a short-term game. gain, not a long-term solution. And so I'm cautious about the recovery.

I think you previously said that you are worried about a wave of bankruptcies. Can you maybe give us some color about what you're seeing out in your region in the Midwest? Is that actually happening? And are you worried about contagion from bankruptcies to the financial system? Yes, to both. I mean, we're seeing it already with lots of small businesses, restaurants that very quickly, you know, restaurant margins in good times pre-COVID were pretty slim for most restaurants. And then when they got shut because of the COVID crisis, a bridge was provided in the form of the PPP program from Congress. But even some restaurants said that bridge is not enough for us, we're going to close up. So I've been surprised, even in Minneapolis, some very well-known restaurants have already closed up shop and said, we're not going to reopen.

And the longer this goes on, the more bankruptcies we're going to see. unfortunately, restaurants, coffee shops, you know, gyms, et cetera. And think about this way. Some restaurants have said, well, we're going to reopen at 50% capacity. Well, if their margins were so slim at 100% capacity, how long can they run at 50% capacity to maintain social distancing? And yes, the longer this goes on, the more bankruptcies we're going to see, both small, mid-sized and large businesses. And ultimately, those losses roll up into the banking sector. because if a restaurant goes out of business, then whoever held the lease where they were leasing their space, it's harder for them to make their mortgage payment. That ends up rolling up into the banking sector.

And so there's great uncertainty about the path of the economy because there's great uncertainty about the path of the virus. And therefore, there's great uncertainty about how many losses the banking sector is ultimately going to face. You said early on, I think it might have even been like in April. I think you said in the FT that banks should stop paying dividends actually take this time to raise capital. Do you still feel that that would be a smart move? Are you still urging banks to take steps to bolster their balance sheet? Because at this point, investors really just don't seem particularly concerned about systemic financial system health. Well, I think I am still concerned about it.

I think the reason you're seeing the markets recover the way they have is, frankly because of the Fed. I mean, the Federal Reserve has taken extraordinary action beginning in March responding to the coronavirus. We've acted much more quickly and much more aggressively than the Fed acted, even in the 2008 crisis. And I applaud us for doing that. It was the right thing to do. So I think markets are saying, well, the Fed has taken some of the financial risk off the table so we can now focus more on the upside. But I think that, you know, if you look at where bank stocks are, they're not performing as well as the broader stock market. I think there's still concern that the losses that the banks are exposed to, it's really unclear and really

uncertain. And so I'm still focused on it. You mentioned the policy response to the COVID-19 crisis versus the policy response from the financial crisis of 2008. And this is something that obviously Joe and I have been talking about a lot. But when you look at what the Fed has done this year, what stands out to you as the most helpful policy and what would you have done perhaps differently, if anything? Basically, we just said through all of these myriad facilities, we said we are going to exercise our lender of last resort function as aggressively as we need to support the financial system and to support the economy. And that I completely support it. And, you know, there are certain programs that have been bigger uptake than others. Some programs you would argue, well, there's not much

uptake because markets have largely recovered. The whole theory of central banking is in an emergency, you lend at a penalty rate. That penalty rate is relative to normal market conditions, not relative to stressed market conditions. And so if markets are recovering so that market participants will say, well, we'll just transact with each other because we can get better terms from each other. We don't need to go to the Fed for their penalty rate terms. In a sense, that means our programs have been effective. So I think we could probably with the benefit of hindsight and over more time, look back at one program here or one program there and say, we might tweak this or that. But overall, I would give Chairman Powell and the Federal Reserve, my colleagues, high marks for playing

our role. But this is not like the 08 crisis. I mean, this is, as you all know, this is first and foremost a health crisis. And so we are not the first responders. The first responders are the doctors, the scientists, the nurses. And then Congress has been very bold so far. I think the question now is going to be what does Congress do from here. We're playing our part, but our tools are limited in this crisis. Well, so this gets to what I would say is probably one of the biggest sources of criticism of the Fed, which is that when the Fed does its part, but Congress maybe kind of only partially does its part or does its part in Pits and Start, that it exacerbates inequality. And right now we have unemployment at still over 10 percent, but the stock market is higher than

ever was. And like the NASDAQ is up over 20% this year. Just extraordinary gains in financial assets. People who owned their house have seen in many cases housing has done really well. So what do you say to critics who say that a huge impact of these Fed actions is to exacerbate inequality? And how do you think about the impact, the sort of cost of increasing inequality when you weigh it against the benefits of easing to support the economy? Yeah, well, I would say let's just, for the sake of argument, let's accept their premise. Let's say that the stock market is because of the Fed and housing prices is because of the Fed. What's the alternative to try to keep the stock market down?

Should we punish those who are out of work today by making it harder for them to find a job? The people, especially the anonymous trolls on Twitter, squawk about this year in, year out. And we were finally seeing at the end of the recovery, real wage gains. Wage gains, net of inflation were growing the fastest for the lowest income Americans. And we were finally seeing a job market strong enough where we were bringing back in people who had been left on the sidelines. The most valuable asset the vast majority of Americans have is not their house because many Americans don't own a home.

It's not stocks because they don't own stocks. It's their job. And by having a strong economy and a stronger, recovery and a stronger job market, we are benefiting the vast majority of Americans. And again, I just go back and say, let's say your goal is to tamp down the stock market. Okay, let's go tamp down the stock market. But if the cost of that is to have more Americans out of work with lower wage growth, that's a really high cost in my book. I have a bunch more questions on inequality. But before we get there, you mentioned Twitter and anonymous trolls on Twitter. And I mean,

you are an active presence on that platform. And I've always- Finally, we're getting straight to the important stuff. The really important things. But I've always wondered why. Like, is there an element of masochism there? Because, like, Joe and I know that as soon as you tweet something about the Fed on Twitter, you will get a bunch of people who are going like, oh, the Fed, they don't know anything,

ridiculous, you know, making the rich richer, all of that. Like, why are you on that platform? And what is the benefit that you get out of it? Well, it's a good question. I mean, it was an experiment when I joined the Fed. I think many people across the Fed are the most, you know, Jay Powell, Janet Yellen before him want to increase transparency, want to make us more accessible to the public. So this was an experiment that I said, let me go try and see if this is a useful way to, in a genuine, authentic way engage with the public. And I think there's benefit to it. I do think that I have been able to get my message out. I have been able to engage with people who wanted to engage in a genuine way. And I think that's been positive. I mean, the cost. is, as you said, the signal to noise ratio is quite low. For every Ernie Tedeshi, there are a hundred angry anonymous cranks out there. And how do you focus on finding the Ernie Tedeshes who are doing a really thoughtful analysis that I can learn from and just have to tune out the anonymous

crank? So, you know, I don't know when future presidents or whoever eventually succeeds me, will I recommend that they have an active Twitter presence? I'm not sure. There hasn't been a big cost to me because I'm pretty, I think I'm pretty comfortable just being criticized and tuning out the cranks. But, you know, it's not overwhelmingly positive. I'll just say that. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Ruffini. We'll bring you the latest headlines, in-depth analysis, and big interviews, all the stories that hit home on your days off.

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Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. So let's get to, you know, this tension and it comes up on Twitter all the time, but it's really sort of precedes Twitter, which is that, yes, perhaps monetary policy plays this role in inflating financial assets.

But as you point out, the sort of number one. asset that most people have is their job. And ultimately, we have to get the unemployment numbers down. But, okay, so we agree 10% unemployment. It's still long way from normal, just absolutely unacceptably high by any standards. But this gets to sort of the bigger question. And I think it's the one that precedes coronavirus, which is, how in the future are you thinking about ways in which the Fed could truly incorporate the employment mandate into its framework. Because we saw the Fed first hike rates post-last crisis in 2015 long before we reached full employment.

They just kept dropping. No real inflation, no real wage gains. We saw a round of hikes in 2018 that needed to be reversed 2019. Meanwhile, the unemployment rate just kept dropping. How are you thinking about the challenge going forward of when we, sort of have a normal economy of not repeating some of the errors in the past where the Fed hike rates too early when there were still lots of labor gains to be had out there. Well, so first of all, I agree 100% with the premise of your question. The tightening cycle that began in 2015 was a

mistake. It was predicated on a misreading of the labor market. We thought we were at full employment and, or in some cases, beyond it, and we needed to hurry up and raise rates before inflation came. And obviously, inflation didn't come. So we have to learn from that. And we have to recognize that the vast majority of people want to work. You know, one of the big frustrations I have in the economics profession is every time there's a recession, they then immediately, the economists immediately ratchet up this thing called the natural rate of unemployment. Like all these people have been dislocated. Now the natural rate of unemployment is five or six. And if you get below that, it's going to lead to inflation.

And it's just bunk. It's total bunk. And so first thing we should do is stop doing that. the vast majority of Americans want to work and have given a chance and decent wages, they will surprise us and continue to reenter the labor market. That's one of the things that we learned. I hope we've learned. I've learned in the last recovery that that is profoundly true. So we have to learn from that and not raise rates ahead of inflation.

If you look at our inflation target, it was officially adopted in 2012 at 2%. We basically undershot 2% the entire time. I mean, we blew it. And so let's not raise rates this time until we actually get inflation sustainably back at our target or even above it to make up for prior shortfalls. So something I've been wondering, but if we say that the Fed has been pretty bad about achieving its 2% inflation target and that it's also difficult to confidently come up with an estimate of full employment, would it make more sense to target something like wages? instead of the actual employment level? Well, that's how we think it's supposed to work. So think about two bridges.

One bridge is from how many people have jobs, the unemployment rate or the inverse, the employment rate. So the way it's supposed to work is the labor market tightens. People go back to work. Businesses have to compete to find workers. And then that bids up wages. So the first bridge is between unemployment and wages. And then the second bridge is wage growth starts

to pick up between wages and the broader measure of prices and inflation. So you're right. I would say that wages is better than focusing on the unemployment rate, but even better yet, let's just cut the bridges out and let's just focus on inflation. So a year, more than a year ago, I proposed that the committee adopted forward guidance that says we will not raise rates until core inflation gets back to 2% on a sustained basis. And by the way, I would note a few months later, the ECB, the European Central Bank, adopted a version of this publicly in their policy statement. I think forward guidance that is

anchored to an outcome of actually achieving our inflation target would be a big step forward relative to where we are today. So you mentioned the inflation outlook there and the inflation target. And one of the things that is supposedly up for discussion at Jackson Hole is the notion of the Fed moving to some sort of average inflation targeting. But I guess my question is, are there any tools out there to make that policy approach any more effective than the previous inflation targeting regime? And exactly what would you at the central bank do differently to achieve average inflation of 2% more quickly? Wouldn't it make more sense to maybe just jettison the forecast of inflation rather than to actually change the policy approach? So rather

than saying we're going to get an average 2%, why not just sort of get rid of that and target something else over the longer term? Well, I mean, the number one job of central banks, I mean, first they were created for lender of last resort. But beyond that, it's making sure that prices are in check. And we talk about our dual mandate that Congress has given us of stable prices and maximum employment. We can measure inflation. It's not perfect, but we can measure inflation. As you said earlier, Tracy, it's very difficult to know are we in fact at maximum employment. And so in my book, given the mistakes that we made in this recovery, I think a much stronger focus on. actually achieving our inflation target.

Some people have suggested adopting a formal makeup strategy like a price level target or a formal average inflation target. To me, mechanically tying ourselves to such a rule can be problematic because there might be circumstances that you don't want to stick to it. But I think that there are ways of being better, having more success in achieving our inflation target, and not preemptively raising rates. So I want to go back to something you said

where you mentioned that economists had this sort of bad habit of every time there's a recession, they mark up what they view as the natural rate of unemployment. And so that implicitly means that if the Fed were to take that seriously, it would tighten too soon. And just in general, there's a lot of skepticism that you have about some of these sort of assumptions about this sort of relationship between employment and inflation. And I'm curious, like, neither you nor the current Fed chairman Powell have sort of of formal academic economic training. And I'm just curious whether that gives you more comfort or you're sort of less attached to some of these old models, some of these models that

posit some sort of mechanical relationship between this or that. Unemployment goes here. Therefore, inflation will go up there if we don't do X. Do you feel like you can sort of be a little more skeptical or less tied to them in part because you don't, haven't spent years sort of in academia doing economic work? You know, I think so. Look, I'll say I benefit from the fact that we have a brilliant team of PhD economists at the Minneapolis Fed and around the Federal Reserve System, who I learn from and I debate and I discuss. So I don't want to discount that. They're enormously important part of the process. But I'm not wedded to some model I was taught 40 years ago in graduate school, that this is the way the world works and you need to just think about the world through this one framework. And I think that, you know, just the discussion of the natural rate of unemployment. Why is it that economists always assume when there's recession, the natural rate of unemployment ratchets up, and then only falls back down only gradually over time. And they come up with all sorts of dislocations, fancy words, skills mismatch, skills diminish. Boy, this is an enormously costly error that we keep making. People want to work.

And that's one of the things that we've learned. And if we just allow the economy to recover, I think they will continue to surprise us. And so, yes, I do think that not being an economist has helped me at least see that, but that's not to say that economists can't see that. But that's not to say that economists can't see that too. So what is the reluctance so far to adopt a more formal forward guidance, state contingent forward guidance framework? What do people see at the Fed when you're having these discussions? What are perceived as the costs of saying like, okay, we are not even going to think about,

thinking about raising rates until either inflation is above X for so long and or unemployment is below X? Why the discomfort with that? I don't think there is right now great discomfort with it. I think through the committee's work and the chairman's comments, I think market expectations are that rates will be low for a long period of time. And so I don't feel like there's burning pressure that we need to change our forward guidance today to change market expectations. I think the committee's already done a good job setting expectations. So I think the work will comment, you know, my guess is that we will adopt some more formal form of state contingent forward guidance, but the committee just hasn't gotten to that conclusion yet. But I think, I suspect

that we will get there. You're generally considered to be one of the more duffish people at the Fed. I think that's a fair characterization. What do you say to people who argue, you know, to people who make the argument about the idea of the central bank running out of ammunition, if you lower rates too early or for too long, it means when the next economic crisis comes along, the Fed won't have in a firepower or the tools at its disposal to actually make a difference. What do you say to that argument? I mean, I'll be blunt. I think it's an absurd argument.

And let's imagine that the CDC had told us a year ago that a terrible pandemic is coming. Should we have raised rates last year to slow the economy down so that we could then cut rates when the pandemic hit? It just makes no sense. And so, I mean, people say it all the time. You know, the best analogy I have is, let's say you're driving down the highway and you think that there may be a hill on the horizon. Should you slow down now so that you can floor it when you get to the hill? Of course not.

You should just maintain your speed. And then if you only have less pedal to give, so be it. But slowing down in advance of the hill does not actually help you. And so it's a nice sound bite until you stop and think it through and then it just collapses. So obviously you mentioned at the. outset that one of the most powerful things the Fed has done is really sort of establish itself in its lender of last resort and really back up the corporate sector as a whole, not just the financial sector, but really sort of be there to back up the corporate bond market, basically.

And it has been incredibly powerful. And right after it's announced, we saw this huge, incredible rally in the credit markets, credit conditions ease. Are we ever going to get back to a point in which, you know, monetary policy is going to be raised? raising rates 25 basis points, cutting rates, 25 basis points. Or are we now sort of in this permanent world in which the key monetary policy decisions are not the rate moves, but the sort of like, oh, now we're going to adopt a totally new policy or find some totally new framework or new idea? Are we, is this, is this interesting monetary policy what we're doing to for the rest of our lives? I don't think so. I mean, I think it'll be underneath the question you're

asking is a question of when is the neutral interest rate going to climb back up to what we've been used to prior to the past 10 years. And what is the neutral rate? That's the rate that clears savings and investment in the economy. And that really is, when is there going to be a much greater demand for investment capital? Where are the big demands for capital today? I mean, think about Facebook and Twitter, we talked about Twitter earlier. These don't require much capital to create these programs. Even Uber doesn't require much capital. What requires a lot of capital? Oil investment in North Dakota and Texas and Oklahoma. That's probably the biggest destination for capital. So when we see in our economy big demand for a lot of capital for positive

ROI projects, that is when I would expect to see what we call R-star, the neutral interest rate rise back up again, and that will bring us away from the zero lower bound. And then we'll get back to more of a normal monetary policy environment or remove rates up and down around that higher neutral level. The challenge for us all right now is the neutral rate is so low because of these other macroeconomic questions about investment. And that's why we have to do these extraordinary things because we're near or at what we call the effect of lower bound. This is actually something that I've wondered for a while. But to what degree is the R-Star or the neutral rate idea driving monetary policy decisions at the Fed? And why did it seem to

suddenly become popular? Like, I think it was probably about four or five years. ago, we really saw a lot of policymakers and especially Powell talking about our star in a way that Fed chairs hadn't really done previously. Why did that happen? I think it happened because we were all a little bit surprised that inflation didn't come. You know, rates are low relative to history and everyone says, oh my gosh, we're at full employment or beyond full employment. That means inflation must be around the corner. And yet inflation didn't come. And so when you start looking at this and saying, why isn't inflation showing up? Okay, one explanation is there's more slack in the labor market that we didn't appreciate. Another explanation is, hey, maybe we're not providing much

accommodation. If our star is low, maybe we're not providing any accommodation. And we're just kind of following the economy along. And so I think the way that the economy responded, the way that inflation didn't materialize, forced all of us to say, hey, let's reexamine some of our assumptions. And one of those fundamental assumptions is what interest rate is neutral, what interest rate constrains the economy versus what interest rate stimulates the economy. So trying to figure out what is going, what are the set of economic conditions that will actually sort of raise our star, sort of create this demand for investment capital and so forth. And this really gets to what Tracy and I think we're talking in the beginning, which is that even pre-coronavirus, and you just said it right there,

which is that the surprise that monetary policy wasn't, that we weren't seeing inflation. Do we need a handoff, so to speak, from monetary policy to fiscal policy? We saw this very robust spending with the CARES Act, but now that's expired. And so far, there's no deal to renew it, either to renew PPP or renew the unemployment insurance expansion. So A, in the short term, how significant of a problem will this be, if we don't get that renewal. But in the long term, should there be a more sustained role for aggressive monetary or aggressive fiscal policy in reviving and maintaining economic expansion? Well, I think in the short term, it's a big deal.

It's a very big deal. I mean, the reason, Tracy, you talked earlier about potential losses in the banking sector. The banking sector already got a huge bailout. They got a bailout because Americans who lost their jobs got these additional $600 a week. and that enabled them to make their credit card bills, make their auto payments, make their mortgage payments and their rent payments. And that really supported the financial system as a whole and the banking sector in particular. So with those expiring, boy, I hope Congress comes back together to extend them. That's really necessary to sustain our economy until we get through

this COVID crisis and we can all hopefully get back to normal sooner rather than later. Over the long run, I think the question is where should the government invest? I mean, I look at it very differently. If the government said, we want to go spend and wire the country for broadband, I think that's a no-brainer that they should do it. We can afford it, and it's the right thing to do, and it would be good for our economy. But I would make a distinction between investments by the government, such as in broadband, versus just ongoing spending. You know, you can, the government can spend money, can support consumption as they are with the CARES Act. But that over the long term doesn't actually boost our economic potential.

That just sustains consumption in the short run. So once we get through this, I think focusing the government's resources on real investment, I think that that would be, that would largely pay for itself. So you mentioned, you say that spending on, say, infrastructure or say like broadband would boost the potential of the economy. more than spending that was just aimed at sort of maintaining and consumption. But on the other hand, if we had sort of sustainable consumption, if households could always spend, if businesses were confident that households wouldn't have to retrench as fast in a downturn, might that make them more inclined to do capital investments with that confidence that end

demand would be more stable and robot? I can't say it's impossible. I haven't seen any evidence that that is true. When I talk to businesses about where they want to invest, it's much more a question of, you know, where are we going to get the return? It's not that I've not heard business to say, well, I'd make this investment in this new plant,

but I think there may be a recession in five years. I haven't heard a lot of that. It more seems like where are the technology breakthroughs that are going to lead to new industries that are going to lead to expansion opportunities, new markets, et cetera. So to me, government, investment, you know, government investment is a murky thing in the best of times. You know,

you never know for sure if it's going to pay off. I think focusing on things that have a reasonable chance for a return makes more sense to me than just saying, hey, we're going to support consumption forever for consumption sake. It's hard for me to see the ROI from that. I mean, there does seem to be a general consensus about the need for fiscal stimulus in the current situation. How do you see how do you see monetary policy interacting with fiscal stimulus or or amplifying it if that's possible? Well, I think that there's I think monetary policy is supportive by making sure the markets are functioning. You know, we saw stresses in the treasury market. In the acute part of March, when everybody just got terrified by the coronavirus, investors,

businesses, individuals just said, we want cash. And so they were shunning all. all types of financial assets. And so that's why the lender of last resort of the central bank stepping in was so important to provide that confidence to make sure markets are functioning. And so us continuing to provide that support will make it, will ensure that the government can continue to go out and raise money to get us through this pandemic. So we're providing a complimentary supportive role. But ultimately, it is going to be up to Congress to say, hey, we're going to do more for

the American people who've been laid off. We're going to do more for the businesses that. that have been dramatically affected by the COVID crisis. Only the Congress can do that, not the central bank. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report, delivered right to your podcast feed.

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And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within minutes. So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts. We're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. So, Neil, I wanted to turn the conversation a little bit because you're, as mentioned, you know, you're the president of the Minneapolis Fed. Minneapolis is really, you know, the sort of the central location that catalyzed the protests that we've seen this summer against racism, against police violence in the wake of the killing of George Floyd.

I want to talk a little bit about, you know, the Fed's role here. We had a guest on the podcast a few weeks ago, Congresswoman Iona Presley, arguing that the Fed itself, monetary policy itself, can do more to fight racial inequality. And she pointed out the fact that's sort of very easy to see in the charts, which is that the relationship between black unemployment and white unemployment is cyclical and that during periods of, during boom times, that spread compresses. and we start to see the unemployment rate between blacks and white start to go down. And so she made the argument that this should be more of a focus for the Fed and monetary policy. And I'm curious whether you share that and whether you think that monetary policy can play a positive role in addressing racial inequality in this country. Well, I think through our earlier discussion about not raising rates prematurely, I think monetary policy does have a role to play in helping workers who've been left on the sidelines

by creating as strong and economic recovery as possible to bring everybody back in. The problem is recessions do happen. They will happen in the future. Shocks like the coronavirus will come out of nowhere. And then the problem is that many of those folks who last joined the labor force are often the folks who are the first ones

to lose their jobs in a downturn. So I do think monetary policy has a role to play, but it is unfortunately not the strongest or the most important tool. The most important tools are going to be from the fiscal authorities from Congress in helping to create an economy where everybody can fully participate and everybody can benefit. There are just limits to what monetary policy can play. And I think that's just the unfortunate reality. Are there specific things that monetary policymakers can do to help a racial equality? Like, for instance, could you have full employment targets for different

racial or socioeconomic groups? And if you were to do something like that, why should people have, this is going to sound very cynical, but why should people have faith in your ability to help, you know, a really entrenched problem such as inequality when arguably you've had difficulty reaching both the inflation target and the full employment target for many years, or at least we're not entirely sure what full employment actually is at this point. Right. Well, this is, I mean, it's the core of those two things. We think that the maximum employment objective and the stable price objectives are like a seesaw, where you're trading each other off. In optimal monetary policy, those two things should be intention. For the last

10 years, there's been no tension because we've undershot our inflation target and there's still been slack in the labor market. That only happens if monetary policy is too tight. So let's assume that we learn from that and that we don't repeat that mistake again and that we don't preemptively raise rates and cut off the expansion. Well, let's imagine, though, that we just said, well, we're going to target black unemployment and that black unemployment is our new maximum employment objective. The challenge is, what does that mean for inflation? And if you will say, well, we're going to get black unemployment down to 4%, which would be terrific instead of double what it normally is for white unemployment, it's usually a two to one relationship. If that then leads to losing our inflation

target, meaning we hit 3% inflation or higher, then we're failing on that end of our dual mandate. And so I think that we need to learn everything we can from the experience the last 10 years. We need to push the labor market as hard as we can until we get to our 2% inflation target. and maybe even a little bit above it if we're making up for, you know, prior misses. But I think that if we have to keep our eyes on both ends of that seesaw, and that's where just targeting one, you know, black unemployment as an example or Hispanic unemployment, it may not actually work to balance out both sides of our dual mandate. We did see, however, that in the final years of the last expansion, there were numerous stories.

I think they were, you know, I think you talked about them and the chairman. to talk about them and there were lots in the media about how as labor markets got tighter, employers really did start to look to hire from pools of workers whom they had previously excluded. So for example, former felons that maybe wouldn't pass an initial screen for employers getting hired, getting retrained, employers paying to retrain them because again, that competition for workers. So is there an argument that regardless of, you know, whether there is a specific level to be targeted, that the composition or that gap in employment between different races should be a variable that you look at and should be something that you

consider that, okay, you know, perhaps there really is more room for labor market expansion because we'll start to see businesses invest and hire people that they were not hiring in the early parts of the recovery. Absolutely. No, I mean, trust me, I agree with that 100%. And just as a friendly reminder, I'm the one person in the committee who dissented against all of our rate increases every time I was a voter. For exactly the reasons that you and Tracy are talking about, that we are seeing these gains, I'm just simply saying there may be a limit to how far we can push that. And so we can't just say, well, we're going to ignore inflation and just target the labor market. One of our mandates is to make sure that we do have stable prices. And so let's push the labor market as hard as we can.

Let's get all the gains that you're just talking about, subject to. actually achieving our inflation target. And given our recent history of the last five or more years, that would actually help us achieve our inflation target. We've been very focused on the domestic situation in the U.S. for obvious reasons and inequality within the U.S. But I wondered if we could sort of turn our gaze internationally and talk a little bit about how the Fed is thinking about the international economic system. To what extent do international, do international, financial conditions factor into your thinking, or I guess another way of phrasing this is, does the Fed feel like it is central banker to the world, or does the Fed feel like it has a

responsibility to the wider world when it's thinking about U.S. financial conditions? Honestly, we are really focused on what it means for the United States economy and the American people. And we have staff in Washington and staff around the Federal Reserve System run lots of analysis and lots of scenarios of what's happening in other economies, but it's always through the lens of, you know, if the world economy does poorly, that's probably going to be a drag on the American economy. If there are financial disruptions in Europe, that's probably going to affect the American economy and the American financial system. And so we were created by Congress to represent and support the U.S. economy, and that's what our focus is. But the U.S. economy is not

isolated from the rest of the world. And so we do look at it predominantly through what does it mean for the American economy, but the rest of the world really matters a lot for the American economy. Neil, you know, as I mentioned in the intro, you were active on the Treasury side of things in the last crisis. And I'm just curious how you find the difference and how you, you know, you probably when you join the Minneapolis Fed, you probably didn't expect to see another cataclysmic economic crisis. But here we are. We have one. And so I'm curious, like sort of what, what have been your experience observations going from the Treasury side last time, be on the FMC this time. Well, you're right that, I mean, I just can't believe it. I mean, I thought once in a lifetime,

once in 100 years or once in 80 years, we'd have an event like this. I can't believe it's happening again 12 years later. You know, interestingly, having lived through that on the front lines and remembering how scary the 08 crisis was, it gives me confidence that we will get through it, that we as a country will come together to support the workers, to support the economy as a whole, and we will get through this. The question is, how do we get through it, inflicting as much, as little pain as possible and as little hardship as possible, recognizing that there's so much that's out of our control. So interestingly, it's given me more confidence that we will get through this. We have the tools to get through it,

but I also can't believe that we're in the middle of this kind of stuff again. So my last question is going to go back to social media and the anonymous Twitter trolls. And I don't mean to do a bunch, sorry, I don't mean to do media navel gazing here, but I think it actually gets to something really important, which is that it feels like a lot of people really dislike and even hate the Federal Reserve at the moment. And you seem to be a beacon for a lot of that criticism because you've been very doveish. You know, you worked at Goldman Sachs. You got hired by Hank Paul. over at the Treasury, you don't necessarily have that academic background in economics. At what point does populist dislike of the Federal Reserve become an actual problem for monetary policy? Is that something on your radar or is it something that the Fed would ever consider? Oh, it does matter. I mean, ultimately, we need to have the confidence of the American people. We were created by Congress. We were accountable to Congress. And so public opinion does matter a lot.

And I think part of the reason that Chairman Bernanke and then Chair Yellen and Chairman Powell and all of us have been working hard to increase transparency and to engage with the public is to make sure that they know us, that they have visibility into what that we're doing so that hopefully they can have confidence in the actions that we're taking. I mean, the anonymous cranks on Twitter do not, they're just loud, angry voices in the corner. They're not representing the American people. this is what I find so amusing. I go out pre-COVID, and I do town halls all the time, all around my region, six states, a couple hundred people will show up, I'll answer questions for an hour. It's all live stream, so it's totally transparent. Those are all totally civil. People ask questions, not everybody agrees with me. We have very thoughtful discussions, and yet that's so far removed from the angry cranks on Twitter. And that's what I just think is so annoying, is that they're not

representative of the American people at all. I also, my colleagues do, we meet with elected representatives, senators and congressmen and women from our regions all the time. They hear from their constituents and they share feedback with us. And so, you know, Twitter, as you all know, Twitter is not real life. And I think that the Federal Reserve has earned the respect of the vast majority of the country. And we're going to work hard to achieve the goals Congress has given us to maintain that respect and to maintain that confidence. So the real question is, your fellow FOMC members, will you tell us all of their anonymous Twitter handles and the handles that they're tweeting under? That's what we all want to know. They might be my biggest critics

on Twitter. Well, I think we can wrap it up there. Neil Keshkari is a real treat to get to talk about these things with you and really appreciate you taking the time. And thank you so much for coming on a lot. Thank you, Joe and Tracy. I really enjoyed it. Thanks, Neil. That was great. Tracy, I thought that was a real treat. I mean, you really just don't get many opportunities to chat with someone active in monetary policy, sort of talk big picture. So I thought that was pretty cool. Yeah. And the great thing about Kashkari is that he does straddle the worlds of banking, fiscal and monetary policy by dint of his career history. So it's really great to talk to him. And of course, next year, he's going to be a voting member as well. I mean, it really is, I don't think it could be underscored enough. It really is just an extremely interesting and important time. And there were all these pretty big debates, like all these questions about the framework,

inflation catch up strategies, monetary to fiscal handoff. Like, they were all being discussed prior to this crisis. And it really, the degree to which this crisis has brought all these issues to a four really just sort of makes it what could potentially be a really sort of big pivoting. point in economic history. Yeah, it feels like we talk a lot about the coronavirus crisis having accelerated a bunch of different economic trends. But of course, one of the trends that it's accelerated is this big question mark over the efficacy of monetary policy. And I also feel like we should just mention again that we've recorded this on August 26. It's the day before Jackson

Hull. So we don't know what's going to be announced there, whether there's going to be this big overhaul of the Fed's inflation framework, but that'll be something interesting to find out. Yeah, something that's, I think is interesting, too. And even though Neil is not a trained academic economist, he still is very much an adherent to this idea that there is this inherent or that there is some employment inflation tradeoff. And so I think when people think about like, okay, they're revisiting their framework, they're revisiting their strategy. You know, and I hear that, it's like, yes, they are revisiting it, but it's in with a fairly narrow set of prior assumption.

It's not a radical departure. It's not a sort of like complete rethinking. It's like, yes, there is this tradeoff. Yes, there is a, at some level, there is this tension between employment, the strength of the labor market and inflation. but within that framework, what can we do to make the outcomes better? But, you know, I do think that sort of when we talk about the Fed, it is a sort of, it's a small C conservative institution.

It has these assumptions and even something like a multi-year look at the strategy. It's most likely going to be something, you know, when we sort of think about their new approach, it's going to be pretty incremental. I mean, to me, the more interesting thing besides changes to the actual target framework is just how they are estimating the various stars that go into our star, the assumptions about full employment and things like that. I find that much more fascinating. And if you think of the Fed as a conservative institution, then the way it's measuring these different variables is probably going to be more important than the target itself.

So, yeah, that's something I'd be looking out for from Jackson Hole. Yeah, I'm very excited to see what we learn over the next couple of days, which by the time people listen to this will be in the past. Yes, okay, hopefully this conversation is not completely outdated by the time it airs, but I don't think it will. Fingers crossed. These are pretty big questions. Yeah, all right. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway.

You can follow me on Twitter at Tracy Alloway. I'm Joe Wisenthall. follow me on Twitter at the stalwart. And you should follow our guest on Twitter. Neil Cashkari, President of the Minneapolis Fed. His handle is at Neil Cashkari. And if you're a angry Fed hater goldbug, you should like show up at one of the meetings and like talk in person

and don't just troll online. But definitely follow him. He's a great follow. Follow our producer, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca today. And check out all of our podcasts under the hands. handle at podcast. Thanks for listening.

I'm Francine Lacqua, an award-winning journalist, and I've got a new podcast, Leaders with Francine Lacqua from Bloomberg Podcasts. I've interviewed everyone from heads of state to fashion icons about the news of the moment. But I've always been curious, who are these people as leaders? I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. with Francine Lacroix, wherever you get your podcasts.