By Jeff Berkowitz,
Chicago Bureau Chief, Illinois Channel
August 3, 2020
Chicago Fed President Evans: Two years until full U. S. Economic Recovery
Today, I attended, with other media, a virtual press conference held by Charles Evans, President of the Federal Reserve Bank of Chicago. He was strikingly pessimistic, saying that US GDP is unlikely to return to pre-Covid levels for another two years.
Evans on K-12 School re-openings
President Evans noted that K-12 schools not opening for in-person learning is a significant problem for the economy: “When you have to take care of your children at home…that obviously cuts into your ability to be productive.” Moreover, the Chicago Fed Chief indicated he thought that the specific systems to be used for this year’s schooling would have been better worked out by now.
Role of Fed Monetary Policy at this time
Evans indicated that “Monetary policy has an important role to play, but it’s not going to be able solve the virus, to make everybody’s work place safe…” The Chicago Fed President seemed to suggest that until the economy returns to much more normal times, the U. S. will have to rely in larger part on the application of both public health and fiscal policies to fix things. For example, the Fed does not have a lot of room to maneuver on traditional interest rate policy, with actual and targeted Fed Funds rates hovering in the zero range [See further discussion of interest rates, below].
Further, the ball is in Congress’ court now as it focuses on extending some or all of recently lapsed federal unemployment benefits and other actions that will affect aggregate demand. But, the Fed is playing an important and expanded role as a global lender during the Covid crisis. See WSJ, Covid Boosts Fed as Global Lender, August 4, 2020, A1
Also, the Fed has significant lending authority (created during the Covid crisis) with respect to state governments, a number of whom are facing fiscal crunches. Moreover, the individual state governments have a lot to say about the supply side aspect of the U. S. economy, with their control of opening up, or keeping their economies constrained or shut-down.
In short, the determinants of national economic policy have become more complicated, diverse and nuanced during the Covid era.
Fed Forward Guidance- the big banana
Chicago Fed President Evans did emphasize the importance of Federal Reserve forward guidance, noting that the most vital thing the Fed did in its handling of the 2008 crash was its commitment to “Stay with it and keep working on it,” until the economy was fixed.
The Fed committed then to Quantitative Easing, Open Market purchases of $85 billion/month and zero interest rates until the economy turned around. That commitment was the “Big banana,” said President Evans.
Keeping the people in the game
The Chicago Fed Chief said the key now is handling the path of the virus and using fiscal policy [and federal financial aid] to allow “People to stay in the game until the economy is better.”
Tinker with negative interest rates, yield curve or inflation?
President Evans said “Negative interest rates aren’t going to be the tool that we decide to use at this point, or probably at any point.” He explained, “The optimal setting is probably such a large negative number that nobody would contemplate it…”
Neither will the Fed tinker with the yield curve. Any such efforts would do little or nothing to help.
Also, the Fed is not going to concern itself with inflation until it exceeds 2.5%, which is no doubt a long way off.
Fed to take a less conventional role in understanding and dealing with Covid? A safe return to schools and work?
Evans was asked by this reporter if “The Fed should take a less conventional view of the Covid public health policy data and models,” such as those suggested by Wirepoints, Dr. Scott Atlas of the Hoover Institution and WSJ Editorial, The World’s Covid Resurgence, July 29, 2020, A16. That is, stop focusing on both the recent surge in the number of Covid cases and the increase in positivity rates.
Instead, they and I suggest focusing on the implications for policy of the C19 hospitalization and sickness rates from those currently getting COVID, which are much lower than what occurred in the early history of the virus. Back then, the virus was hitting a much larger percentage of older people with significant co-morbidities.
I contended this alternative approach would lead policymakers to promote more vigorously students returning to school for in-person learning and employees returning to work.
The data show, said this reporter, that few, if any individuals, under 20, die or even get seriously sick from C19. Certainly that is the case for young people without serious pre-existing conditions or what become co-morbidities, e.g., serious heart disease, morbid obesity, severe respiratory problems or major asthma issues.
Also, the data show that students are generally not “Spreaders.” But, if teachers feel differently, they can wear masks and try to social distance– to provide extra protection for themselves. The data on not getting seriously ill from C19 are similarly good for employees under 50 in age.
Therefore, almost all students (except the very few with severe prior conditions) could return to schools safely and the great bulk of employees (except those over 50 with very severe prior conditions-or what could become co-morbidities) could return to work in safety.
For those who want to, they could provide extra protection with masks and social distancing. For others still worried about returning to work, most likely a small percentage, they could teach or work remotely.
Impact of real factors on economic growth
This reporter said this approach would thus focus more on the “real factors,” e.g., labor, capital and technology, as opposed to monetary policy, to revive GDP and real economic growth.
Understanding the 154,000 Covid deaths– sources and significance for public policy
President Evans indicated he was generally unfamiliar with my cited sources or the specific alternative approach, above, to dealing with Covid.
The Chicago Fed Chief elaborated, “I object to trying to characterize people with co-morbidities. And then trying to label people. It’s not far from this type of conversation where I’ve heard people say ‘well people need to take better care of themselves.'”
Further, the Chicago Fed President Evans argued: “The state of equal healthcare in this country is abysmal. People who don’t have healthcare access are more likely not to have their diabetes under control and other types of things. This is just an indictment of our healthcare system and access to it. And that’s why this plays out to the extent that it ends up labeling certain individuals more than others. I think that is a big negative. That is not a positive.”
It is significant that about a quarter of the country’s “Deaths with Covid” were in NY, which might be a special case. Further, I contended almost all deaths with C19 have very significant co-morbidities and about half have occurred in nursing homes
Chicago Fed President Evans replied “I was very saddened to see the passing of Herman Cain after he was saying that this wasn’t really a risk. We all need to be very careful. I do think masks can be a big part of the solution, they can limit the transmission. I think good behavior on everyone’s part in that regard could potentially knock it down. But there have been a lot of deaths, 150,000, and it’s difficult to imagine all of this.” [This reporter would have noted, if the press conference had not concluded with President Evans reply, that Cain, 74, had been suffering from pancreatic and colon cancer and perhaps other conditions prior to contracting and “Dying with C19.”]