CNBC Transcript: Former Federal Reserve Chair Janet Yellen Speaks with CNBC’s “Squawk on the Street” Today on coronavirus‘s effect on GDP and the employment rate.
WHEN: Today, Monday, April 6, 2020
WHERE: CNBC’s “Squawk on the Street”
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Former Fed chair Janet Yellen On Coronavirus's effect on GDP and the employment rate
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SARA EISEN: We are joined now by a very special guest, the Former Federal Reserve Chair, Janet Yellen in a CNBC Exclusive. Chair Yellen joining us from Skype. Nice to see you. Good to have you.
JANET YELLEN: Thanks, Sara. Nice to be with you.
SARA EISEN: So, obviously, we are in an unprecedented situation. How are you gauging this severity of the economic shock that we are dealing with as the nation shuts down?
JANET YELLEN: High frequency indicators, particularly ones that bear on the performance of the labor market. Particularly initial claims and what we’re seeing there as you know is absolutely shocking. Probably now, if we had a timely unemployment statistic, the unemployment rate would probably be up to 12% or 13% at this point. And moving higher. So, other sectoral indicators, daily credit card data, other data that we have, has showed dramatic decline in economic activity. You know, probably for the second quarter at an annual rate, we’re going to be looking at a decline in GDP of at least 30%, and I’ve seen far higher numbers. So, this is a huge, unprecedented, devastating hit. And my hope is that we will get back to business as usual, as quickly as possible.
SARA EISEN: On the job’s numbers in particular, I mean, you called it shocking, absolutely, to see almost 10 million unemployment claims in almost two weeks. How bad do you think the numbers could get in this country?
JANET YELLEN: Well, I think the total is continuing to rise. And how bad it gets, I think it really depends on how quickly people can get back to business. My own thinking is our focus needs to be at this point on testing and getting the pandemic under enough control so we can begin to restore business activity. But certainly, unemployment could go quite a lot higher. I’m hopeful the new Small Business Administration and other lending programs will work to continue to protect employment. I thought it was heartening in the recent employment report, even though it’s stale, to see that a lot of the unemployment was temporary job loss that suggested workers are still connected to their firms and if activity can restart, that they’ll be able to go back to their old jobs.
SARA EISEN: People are wondering if this could look like a V or a U or a W. Do you have any sense of what recovery looks like?
JANET YELLEN: Well, a V, which is what we’re all hoping for, is really best-case scenario, and if activity could begin to resume as many assume in June and maybe be back to something more normal by the summer, I think a V is possible. But I am worried the outcome will be worse. And it really depends, in my mind, on just how much damage is done during the time that the economy is shut down and the way it is now, to what extent will workers have their employment connections severed. If firms need to start up their activity and they’ve lost ties with their existing workforce, that will make it that much harder. If households have run down their savings and had to dip into retirement savings or are behind on their bills and have higher debt and lower wealth, their spending patterns are not likely to go back to what they were the corporate distress we’re seeing and that may get worse. It may leave companies -- I’m afraid we will see bankruptcies and companies may end up with debt burdens that make them unwilling to restore the spending or rehire workers, and the more damage of that sort that’s done, the more likely we’re to see a U. And there are worse letters, too like L. and I hope we don’t see something like that.
SARA EISEN: Yeah, you’ve been warning about the corporate debt issues and the fact that so many people binged on debt. And many people point to the Fed policies. Do you regret keeping interest rates too low for too long, that allowed this kind of debt bubble to blow up which is now going to make us even worse?
JANET YELLEN: Well, I think we needed low-interest rates in order to support employment and the economy and to try to get inflation back to the Fed’s 2% target. But I will agree that there are dangers in keeping interest rates too low, and in the low-interest rate environment, and that’s something when we come out of this, we’re likely to see for a long time to come, regulators need other tools in order to constrain the kind of buildup and debt that we saw in nonfinancial corporations over the six, seven years or in the runup to the 2008 crash, to be able to constrain the kinds of borrowing and debt buildup that households have. I call them macro-prudential tools. And although I’ve been a fan of the Dodd Frank reforms, I felt that was a very important bill where really -- we’re fortunate now to have a strong well-capitalized banking system. We’re seeing the benefits of that. What Dodd Frank did to provide regulators with these macroprudential tools was insufficient. So, I would have liked to have seen stricter controls on credit growth, on leveraged lending, over the last several years that would have left corporations in better shape to handle the shock-like we’re seeing now. And I would simply say I don’t believe the regulators had those tools. They’re especially needed in a low-interest rate environment.
SARA EISEN: You alluded to the financial system obviously being better capitalized than where we were in 2008. Though, the stocks have gotten hit pretty hard, how sound do you think the banking system is right now in this country relative to where we were in the financial crisis?
JANET YELLEN: Well, I think the banking system is much better capitalized, has much better liquidity, is doing a much better job of understanding the risk they’re subject to. I think stress testing has been an important innovation. But there will be a lot of stress on banks, and many people feel that what we’re seeing in the economy now, especially if we’re not able to restart activities soon, is about as severe a shock to the banking system to the economy as the severely adverse scenario in last year’s stress test. And so, look, if this lasts long enough, eventually the losses that banks will realize, you know, plus just the fact that we’re in a low-interest rate environment that hurts bank earnings, eventually there will be a toll on the banking system as well. So, I think what’s essential is to do the testing and put in place the public health things that we need.
SARA EISEN: In the meantime, should the Fed make the banks suspend their dividend payouts to preserve capital? Or would that send an alarming signal about bank solvency?
JANET YELLEN: Well, I would be in favor of asking the banks to suspend dividends and stock buybacks. I know that many of the largest banks have said they would suspend stock buybacks. Banks tend to be very reluctant to stop dividends and stock buybacks when they are -- because they -- they worry that it will make them look as though they’re vulnerable and that there’s a reason that they have stopped dividends, that they see that they have difficulties. But if the regulators ask them to do that on the grounds that we need a banking system that is able to meet the credit needs of the economy and we don’t know how severe or long-lasting this pandemic will be, I think that’s a different situation. And the way I look at it, if things go well, the banks will be able to pay those dividends or do the stock buybacks later, and what’s critical is they’d be able to meet the credit needs of the economy.
SARA EISEN: Yeah. I think the bankers would disagree with you on that point. A number of them have said they will not be suspending dividends. They’re in entirely different shape than the European banks, and that they feel relatively confident at this point that they can ride things out.
JANET YELLEN: I know. I’ve heard that. I mean, I still think it would be a better idea to do so.
SARA EISEN: Yeah. So, obviously the Fed has done a lot in the last few weeks. Zero rates. Open-ended quantitative easing. Intervened to steady markets like the credit market and the muni market and the mortgage market. Is there anything else the Fed should be doing right now in your view?
JANET YELLEN: Well, it’s really impressive. The Fed has acted aggressively, quickly. They have absolutely pulled out all the stops. And I think with the additional resources that the CARES act provides to provide equity for them to scale up their lending programs. They now have in place all of the facilities or almost all of the facilities that they’ll need to provide massive support to the economy to keep credit flowing. We don’t yet know the details of the main street lending program. That could be very important. It’s a brand-new program they have no experience with. And they need to figure out how to run that. There are a variety of possibilities, but with the new corporate lending programs, the primary credit facility, the secondary credit facility, the TALF, as you’ve said they’ve cut interest rates to essentially zero and they are doing unlimited QE and interventions in the repo market. They’re providing massive support to the financial markets and in turn, to the economy.
SARA EISEN: What about something like buying stocks? Do you think the Fed should be considering that and if not now, what would it take to get to that point?
JANET YELLEN: Well, the Fed is not legally allowed to buy stocks. The Fed is restricted to buying government debt and agency debt that has government backing. It would be a substantial change to give the Federal Reserve the ability to buy stock. But it is something that’s done in a number of other countries, including Japan. I, frankly, don’t think it’s necessary at this point. I think intervention to support the credit markets is more important. But longer-term, I think it wouldn’t be a bad thing for Congress to reconsider the powers that the Fed has. The Fed’s powers are – with respect to assets it can own, is far more restricted than most other Central Banks. And even with respect to owning corporate debt, the Fed is not allowed to directly own corporate debt and most other Central Banks are.
SARA EISEN: Yeah. I was just going to ask, I mean, if one of the goals is to stabilize the credit market, well what about buying junk bonds. Is that something the Fed should be looking to get the authority to do?
JANET YELLEN: Well, I think that’s something, given the resources that they now have, that they need to think about carefully working with Treasury to decide if that’s appropriate. I think their priorities should be to start up the main street lending program and get these corporate facilities working. There are issues about what the potential losses would be if they move beyond investment-grade bonds and corporations, but it’s something that if this lasts a long time, is worth thinking through carefully.
SARA EISEN: While we’re talking about policy support, you mentioned the CARES act. I think you praised it. What else should Congress be doing? If you were still advising the President, I know you did in the Clinton White House, what would you be telling him as far as stimulus and just how long the government can really keep the economy and workers on this life support?
JANET YELLEN: Well, I think it’s absolutely essential for the government to protect workers. Ideally to keep them attached to the jobs that they have so the economy can more easily begin again when the lockdown period ends. But to support the income of vulnerable workers in households and small businesses. So, I think that needs to keep going. If this lasts a long time, there will need to be additional support for unemployment insurance, possibly further checks to support other needs that households have. I think state and local governments need more support than the CARES act provided, perhaps health insurance, particularly for workers who got health insurance through their jobs and that’s been severed. Those would be things on my list.
SARA EISEN: When you were at the Fed, was there ever any discussion of a pandemic and planning around something like this? I mean, how do you even prepare for this?
JANET YELLEN: Well, there was emergency planning. When I was at the San Francisco Fed, we did tabletop exercises about how we would respond in the event of, you know, a variety of earthquakes or tsunamis or health emergencies. But I don’t know that the Fed has ever done anything on this scale. But certainly, the Fed has taken very seriously the lessons learned from the financial crisis. It learned about how to do emergency interventions and has made sure that one generation of policymakers transmits that knowledge to the next. And I think we’re seeing the benefit of that now that the Fed has been able to quickly restart facilities where there was a huge learning curve during the 2008 crisis.
SARA EISEN: I think people would be interested to know how you are managing, how you’re – what you’re doing on a daily basis and whether you advise and speak to the current Chair Powell?
JANET YELLEN: So, I’m hunkered down at home with my family and telecommuting and learning about Zoom and others, ways to stay in touch with people and continue to do my work. I am talking with some policymakers. I talk periodically, once in a while, with Chair Powell, but he’s doing extremely well. My former colleagues, I feel very proud of them. And I am conferring with some policymakers. Lots of economists I know and think tanks and in universities are thinking very hard about how we can intervene in order to have this terrible pandemic do the minimum damage possible to the economy.
SARA EISEN: Yeah. The ideas are flowing here at CNBC as well. You know, our Jim Cramer was just mentioning this idea to Larry Kudlow at the White House of instituting a type of war bond, because it would be so patriotic, people would be happy to contribute and invest and that would help the federal government to do more, as you have outlined, needs to be done. What do you think about that kind of idea? Would that work?
JANET YELLEN: Well, you know, the federal government is going to have enormous deficits. They’re already running at about $1 trillion for this coming year before the fiscal interventions and now we’re probably looking at deficits well above $2 trillion. So, thinking about how to finance those is something very worthwhile, maybe a war bond is an appropriate approach. We’re fortunate, the government is fortunate that we are in a low interest rate environment, so that the interest burden of that debt is likely to be manageable, at least for many years to come, but it is certainly appropriate to think about the best way to finance the debt and deficits.
SARA EISEN: And finally, you know, I hate to even ask this question, but it’s out there, so I will. You know with the scale of the job losses and the economic toll that that’s taking on our country and the human toll and the devastation, more people are wondering if this is going to be a depression-like economic scenario. How do you think about that? How do you even define that?
JANET YELLEN: Well, I think that unemployment rates for a time may go to depression levels, but this is very different than the great depression or the recession in the U.S. economy that we experienced in 2009 and after. This is -- we started with an economy that was in good shape, with the financial sector that was basically sound, and this is a health crisis. It’s having severe economic effects, but if we’re successful in supporting people’s incomes during this time that the government can be, I believe we will be able to get back to a normally functioning economy in much shorter order than during the great depression, after the great depression or even the great recession.
SARA EISEN: Months? Years? What is a shorter order?
JANET YELLEN: Well, my hope is that – you know, there’s likely to be some lingering effect that could go on for years, for reasons I earlier explained. But my hope is unemployment will come down to normal levels pretty quickly.
SARA EISEN: Janet Yellen, thank you so much for your time and your insight. We appreciate it.
JANET YELLEN: My pleasure.
SARA EISEN: The Former Chair of the Federal Reserve, hunkered down at home like the rest of us.