Federal Reserve VC Richard Clarida: Worst Unemployment Numbers Since The 1940s

CNBC Exclusive: CNBC Transcript: Federal Reserve Vice Chairman Richard Clarida speaks with CNBC’s Sara Eisen today to discuss his expectations for the U.S. economy in the next few months

WHEN: Today, Tuesday, May 5, 2020

WHERE: CNBC’s “Closing Bell”

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The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Federal Reserve Vice Chairman Richard Clarida and CNBC’s Sara Eisen on CNBC’s “Closing Bell” (M-F 3PM – 5PM) today, Tuesday, May 5th. The following is a link to video of the interview on CNBC.com:

Watch CNBC’s full interview with Federal Reserve Vice Chair Richard Clarida

All references must be sourced to CNBC.

SARA EISEN: Joining us now to discuss the economy and actions the Fed has been taking, Federal Reserve Vice Chairman Richard Clarida on the CNBC news line. Mr. Vice Chairman, thanks so much for phoning in.

RICHARD CLARIDA: Glad to be on the show, Sara. Hello.

SARA EISEN: Well, hello. Another day of dismal economic news, and strong stock market. Why do you think the economy is performing so much better than the economy right now?

RICHARD CLARIDA: Well, let’s talk about the economy. And we’re living through the most severe contraction in activity and surge in unemployment that we’ve seen in our lifetimes. You know, and it’s not a typical downturn. And that perhaps is one factor in the markets. You know, we’ve asked people to step back, make an investment in public health. So, this is not a typical recession. It’s going to be a very, very sharp contraction in—certainly in the second quarter. But recovery could begin in the second half of the year. And that today is my forecast. But you know, what we said, Sara, in our statement is this pandemic does pose really considerable risk to the outlook. And the course of the economy is really going to depend upon the course of the virus and the mitigation efforts. What I can say about the Fed is we’re using our full range of tools, our rates, our balance sheet, forward guidance and lending facilities to support the economy through this time. And our policies, we think, will be very important in making sure that the rebound will be as robust as possible. But you know, we’re in for a period of some very, very, very hard and difficult data that we’ve just not seen for the economy in our lifetimes. That’s for sure.

SARA EISEN: So, are you saying though it’s realistic to see a positive print on GDP as soon as the third quarter?

RICHARD CLARIDA: I think that’s certainly in the range of possibility. Again, it’s going to depend on the course of the virus. I mean, there’s a range of views among economists and forecasters out there. But certainly, that’s one that’s a possibility. That is personally my baseline forecast. That’s right. But again, there is enormous uncertainty right now. And again, I’m an economist, not an epidemiologist. And I think we have to be appropriately humble as we are navigating through this period.

SARA EISEN: What about the job picture? What do you think about how high the unemployment rate is going to get? And how many of those jobs can come actually back when economies reopen?

RICHARD CLARIDA: Well, unfortunately, the unemployment rate is going to surge to numbers that again we have not seen probably since the 1940s. We know that from the initial claims data that around 30 million people cumulatively have filed for claims in the last six weeks. And so, the unemployment numbers that we’ll be getting soon are really going to be very, very elevated. As I said, the course of the economy will depend on the course of the virus. There’s a range of scenarios. But there can be a rebound in the economy once businesses reopen and people return to work. But I think realistically it’s going to take some time for the labor market to fully recover from this shock, but that’s very uncertain at this point. But I do think recovery can commence in the second half of the year.

SARA EISEN: Well, in the meantime, the Fed has been putting its measures in place and so has the federal government. We’ve seen actions like PPP and other forms of economic relief. Do you think it’s enough to bridge us to the reopening, to keep people on payrolls and businesses open in a meaningful way? Or is there going to be to have more there if the government in terms of fiscal relief?

FEDERAL RESERVE'S RICHARD CLARIDA: Well, let me talk first about the Fed and then a bit about fiscal policy. As I said, Sara, we’re using all available tools. We’ve cut the policy rate to zero. We said we’re going to keep it there until we’re confident the economy has weathered these events and is on track to achieve maximum employment and price stability. We’re going to continue to purchase treasury and mortgages in amounts needed to support market functioning. And as you and probably your viewers know, and since March 17th, we’ve announced no fewer than nine new facilities to support the flow of credit to households and businesses.

And I like your terminology. That’s what we think. We think we are building a bridge for these facilities until the economy can recover by stepping in and supporting lending. And we’ve seen some evidence, Sara, that just the announcement of these facilities is encouraging the private sector to lend. In particular, we’ve seen a lot of issuance in the corporate market.

But, you know, fiscal policy also plays an essential role. The CARES Act was absolutely essential. Because you know the Fed has lending authority but not spending authority. So, what we can do is we can lend money to companies that are solvent with the expectation that they’ll be paid back. But we can’t transfer income to households and firms. And obviously the CARES Act through paycheck protection and unemployment benefits and other provisions was very, very important to the economy. And it may well be the case depending on how the economy evolves that more policy support will be needed from the Fed and possibly also fiscal policy. It just depends on how this evolves.

WILFRED FROST: Rich, before this crisis, over the past five or six years, there’s been a lot of analysis on how far the ECB and Bank of Japan have gone with their monetary policy. And some criticism of it as well, in part because of the decision to buy corporate bonds and even equities in Japan. How much do you regret the Fed had to go that far this time? Even it was needed, is it a shame that you had to go that far?

RICHARD CLARIDA: Well, I would not use those words. I think that we -- none of us alive today have seen a circumstance like this. And under Chair Powell’s leadership, the community was united that we needed under very unusual and very exigent circumstances, which is the language used in our legislation, that we would set up these facilities. Now they’re temporary. Indeed all the facilities that we have set up are scheduled to expire September 30th of this year in terms of new lending. Obviously any loans we make will remain outstanding. So this is emergency authority. This is an emergency. It is an emergency authority. And at the point that the economy has weathered and recovered from this, we, at the appropriate time, will scale these programs back. So it’s not really a regret. It’s what we need to do given the nature of the shock. And as I said, these are emergency facilities that are very timely and needed at this point and will be scaled back at the appropriate time when we’re through this difficult period.

WILFRED FROST: None the less, do you think there’s going to be a long-term impact on how market participants price risk?

RICHARD CLARIDA: Well, you know, I think that it would be to difficult in a market to forecast something like this pandemic. And again, we think this is an unusual circumstance. We can discuss more the way these facilities are set up. As you know, the Congress in the CARES Act appropriated funds to the Treasury for the specific purpose of vesting in these lending facilities to support the economy through this period. So, there’s a lot of, you know, there’s a lot of structure and legislative language behind these programs.

SARA EISEN: What about the criticism that, you know, the programs that you’ve designed, the nine of them, and the action you’ve taken have really helped Wall Street much more than Main Street? I mean the Fed is familiar with these. We saw it back in ’08, ’09. But the fact the market has soared while unemployment claims are also soaring. The fact the credit markets have cleared up and companies like Carnival can now borrow and yet people are still getting furloughed left and right, losing their jobs. How do you respond to that?

FEDERAL RESERVE'S RICHARD CLARIDA: Well, I think, Sara, the economy is going through – and as Chair Powell said today, this is really a heartbreaking development we’re seeing with -- in particular in the labor market. So, we’re certainly aware and attuned to that. But what I would say about Main Street obviously is supporting the economy and these new facilities providing these programs including the Main Street lending facility that we’ll be launching fairly soon and the other facilities, for example in TALF, in which case we’re going to be supporting consumer credit. Obviously, in our programs we’re buying a lot of mortgage-backed securities and a lot of folks own homes. And so, I think the broader picture is that we are providing support to Main Street and, but, we don’t want to minimize the difficult challenge the economy faces near-term. But we are providing the appropriate support that we can. And we are going to continue to be forceful, proactive, and aggressive until we’re confident that the economy is on the road to recovery, especially for Main Street.

SARA EISEN: So, you’re clearly providing a lot of liquidity to a lot of different companies. What about—I mean, there are always winners and losers, right? You can’t lend to insolvent companies, you can’t take that much risk, junk-rated companies before this crisis. What kind of bankruptcy picture do you think is going to emerge out of this crisis in this country?

RICHARD CLARIDA: Well, I think it’s too soon to tell. I think it’s going to depend upon a number of factors here. In economic downturns, there are those events. We’re in a recession and so some of that is going to be inevitable. I think our focus as policymakers is to make sure the economic recovery when it begins is as robust as possible. But we can’t minimize that we are in a recession here. And, of course, it is a global recession as well and that’s an additional factor.

SARA EISEN: How permanently scarred do you think the U.S. economy is going to be as a result of this pandemic?

FEDERAL RESERVE'S RICHARD CLARIDA: Well, Sara, I think the honest answer is I hope it’s not scarred. I think that there is that risk depending on the depth of this recession and the depth of this recession and depending upon the contours of this recovery. I’m very, very – I’m certainly hopeful and certainly, the Fed is doing everything we can to minimize the amount if any of scarring. But again, as we’ve emphasized given the nature of this shock, it’s going to be essential that fiscal policy also continues to provide support through the economy as well and in particular, that can help to sustain the productive capacity of the economy through this period.

SARA EISEN: If we do head to another shutdown or another downturn or second wave as so many prominent doctors, including Dr. Fauci, say is inevitable in the fall, what else can the Federal Reserve do? You have nine programs. You have rates at zero. Open-ended QE. What other rabbits can you pull out of the hat?

RICHARD CLARIDA: Well, I don’t know about rabbits. But we have a toolkit that we’re deploying now, and we can deploy more as needed in the future, certainly in terms of our lending, certainly in terms of our balance sheet and certainly in terms of our guidance. And you can be assured that we will be doing that.

SARA EISEN: Is there a limit to what the Fed can do?

RICHARD CLARIDA: Well, there is not a statutory limit. Our balance sheet is a decision that we make as a committee under the appropriate guidelines and under the particulars, lending against credit and the expectation that we can repay it. So we can expand those lending programs. You know, Congress appropriated more than 400 billion in the CARES Act to the Treasury for the purpose of investing in these Fed lending facilities. And only be about half of that appropriation has been allocated now so there’s certainly more that can be done on those programs as needed.

SARA EISEN: We appreciate the time, Mr. Vice Chairman, Richard Clarida. Thank you so much.

RICHARD CLARIDA: Thank you, Sara.