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

Whole Week. And Jackson Whole 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 discussion, 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, So by the time people here today's interview, um, the Jackson Whole event, it's actually still happening, but happening digitally sort of like all meetings are happening UH these days. But yes, this is the week of the famous Kansas City Fed Monetary Policy UH 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 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 fete 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 the sort of rethinking of the role of monetary policy, the limits of monetary policy, that the economic costs of over reliance 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 discussion that was already building to a head. Yeah. Absolutely, and the two are sort of feeding off of each other. So it's it's a very interesting moment in time, as

you point out. So I am extremely excited about today's in your should be extremely special because we're going to be speaking to an actual active top Fed official today. Um our guest is well known. He is the president of the Minneapolis for A 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 Tart program, to a public figure for a long time

now on the monetary policy side. Really interesting thinker Neil cash Carry 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 um in time. And I'm curious, like you know, the unemployment rate is back down to just over ten um. 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 the 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. M Um, I think you previously said that you're worried about a wave of bankruptcies. Can you maybe give us some color about what you're seeing um 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 in a restaurant margins in good times pre COVID, we're pretty slim for most restaurants, and then when they get got shut

because of the COVID crisis. A bridge was provided in the form of the p p P program from Congress, but even some restaurants said that bridge is not enough for us. We're gonna 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, etcetera.

And think about this way. Some restaurants have said, well, we're going to reopen at fifty capacity. Well, if their margins were so slim at a percent capacity, how long can they run at fifty percent capacity to maintain social distancing?

And yes, the longer this goes on, the more bankruptcies we're gonna see, both small, midsize and large business is 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're releasing 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 I think it might have even been like in April, UM, I think you said in the ft that UM banks

should stop paying dividends actually take this time to raise capital. UM. Do you still feel that that that would be a smart move? Are you still urging banks to take steps to both the their balance sheet because at this point investors really, you know, 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're we've acted much more quickly and much more aggressively than the FED acted even in the two thousand eight 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 concerned that the losses that the banks are exposed to. It's really unclear and really uncertain, and so I'm still focused on it. Mhm h. You mentioned the policy response to the COVID nineteen crisis versus the policy response from the financial crisis of two thousand eight, 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 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 something largely recovered. The whole theory of central banking is you 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 and 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, one program there, and say we might tweak this or that, But overall I would give Jairmyan Powell, the feder Reserve, my colleagues high marks for playing our role. But this is not like

the O eight crisis. I mean, this is as you all know, this isn't first and foremost a health crisis, and so we are not the first responders the first responders with 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, it fits

starts that it exacerbates inequality. And right now we have unemployment that's still over ten percent, but the stock market is higher than it ever was, and like the Nasdaq is up over this year, just extraordinary gains um 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 just 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 who 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 games wage gains net of inflation. We're 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 um, 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 they were

getting straight to the important, 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, ah, 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 said, let me I think many people across the FED are the most you know j Powell, Jenny Yelling 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, if the signal to noise ratio is quite low for every Ernie todes She, they're a hundred angry anonymous cranks out there, And how do you focus on finding the Ernie Twodesh She's who are doing 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 when future presidents or whoever eventually succeeds me, will I recommend that they have an active Twitter presence. I'm not sure it hasn't. 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.

So let's get to uh, you know, this tension and it comes up on Twitter all the time, but it's really sort of proceed 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 is their job. And ultimately we have to get the unemployment numbers down. But okay, so we agree ten unemployment at least, 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 proceeds 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 high grades post last crisis, and long before we reached full employment, we just kept dropping, no real inflation, no real wage gains. We saw a round of hikes eighteen that needed to

be reversed twenty nineteen. 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 high grades too early when there were still lots of labor gains to be had out there. Well, so, first of all, I agree with the premise of your question. The tightening cycle that began in 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 economist 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 the chance and decent wages, they will surprise us and continue to and to re enter 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 just 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 two we basically undershot two percent 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. Mhm. So something I've been wondering. But if we say that the FED has been pretty bad about achieving its two percent 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. Mhm. Well, that's that's how we think it's supposed to work. So here, think about two bridges. One bridge is from how many people have jobs the unemployment rate or the inverse the employment rate, So you get the way it's supposed to work. As the labor market titans, 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 two percent on a sustained basis. And by the way, I would note a few months later the e c B European Central Bank adopted a version of this publicly in their 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, um the inflation an outlook there on the inflation target, and one of the things that is supposedly up for a 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 two percent 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 two percent, why not just sort of get rid of that and target something else over the longer term? Well, I mean, are the number one job of central banks? That I mean, at first they were created for lender of lash 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 of we can measure inflation, as you said earlier, Crazy, 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 UH 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, uh where you mentioned that economists have 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 did take that seriously, it would tighten too soon. And just in general, you know, 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 formal academic economic training, and I'm just curious whether that gives you more comfort or your sort of um 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 in play, SI 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, I mean, look, I will say I benefit from the fact that we have a brilliant team of PhD economists at the Minneapolis FED and around the fudders Or system who I learned from, and I debate and I discussed. So I don't want to discount that they're enormously important part of the process.

But I'm not when to some model I was taught for two years ago and 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 a 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 allowed the economy to recover, I think where 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 too. So what is the reluctance so far to adopt a more formal forward guidance state contingent forward guidance framework? What do people what do people see at the FED when you're having these discussions. What are pers even as the cost of saying like, Okay, we're not even gonna think about thinking about raising rates until either inflation is above X for so long and or unemployment is below X. Why the why the discomfort with it?

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 uh burning pressure that we need to change our forward guidance today to change market expectations. I think the committee already gone to 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 UH 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. Um, you're generally considered to be one of the more dubbish 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 enough 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 can then cut rates when the pandemic hit? It just makes no sense. And so I mean, people say all the time, you know, at the best analogy I have, 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 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 just 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 established 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 its announced we saw this huge, incredible rally in the credit markets, credit conditions eased. Are we ever going to get back to a point in which you know, monetary policy is going to be raising rates twenty five basis points cutting rates basis points or 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 an hour, going to adopt a totally new policy or find some

totally new framework or new idea. Are we is this is? This is interesting monetary policy. What we're doomed to for the of our lives? I don't think so. I mean, I think underneath the question you're asking is a question of when is the neutral interest rate and to climb back up to what we've been used to prior to the past ten 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? And we think about Facebook and Twitter that 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, in 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 r o I projects, that is when we would I would expect to see what we call our 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 rate 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. Uh, And that's why we have to do these extraordinary things, because we're near or at the what we call the effect of lower bound m hm. This is actually something that I've I've wondered for a while. But to what degree is the our star or the neutral rate idea driving monetary policy decisions at the FED? And and why did it seem to

suddenly become popular? Like I think it was probably about four or five years ago. We really saw um a lot of policymakers and especially pal talking about our star in a way that FED chairs hadn't really done previously. Why did that happen? I think it happened because you know, 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 is an 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 that even pre coronavirus and you just said it right there, which is that the sort of the surprise that monetary policy wasn't uh

that we weren't seeing inflation. Do we need a handoff so to speak from UH monetary policy and 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 P p P or renew the unemployment insurance expansion. So a in the short term, how 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. And the reason, Tracey, 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 these additional six dollars 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 center 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 I look at it very differently. If the government said we want to go spend and why are 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 you 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 um spending on say infrastructure, 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 a 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 in demand would be more stable in robust I can't say it's impossible. I haven't seen

any evidence that that is true. When I talked 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 at It's not that I've not business to say, well, I would 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 the technology breakthroughs that are going to lead to new industries, that are going to

lead to expansion opportunities, new markets, etcetera. Uh So, to me, government investment, you know, government investment is is a murky thing in the best of times. You know, 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 gonna support consumption forever for consumption sake. It's hard for me to see the r o I 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 that markets are functioning. You know, we saw stresses in the treasury market in 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 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 their government can continue to go out and raise money to get

us through this pandemic. So we're providing a complementary supportive role. But ultimately it's going to be up to Congress to say, hey, we're going to do more for the American people who have been laid off, We're gonna do do more for the businesses that have been dramatically affected by the COVID crisis. Only this only the Congress can do that, not the Central Bank. 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, uh this summer against racism, against police violence in the wake of the killing of George Floyd, and 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 Iana Pressley, 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 easily 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 boon times that spread compressive and we start to see the unemployment rate between blacks and whites 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 you know to 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 if many of those folks who were last 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

import 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, uh, and I think that's just the unfortunate reality. Are there specific things that monetary policymakers can do to help racial equality, like, for instance, could you have full employment targets for different

racial or socio economic groups. And if you were to do something like that, why why should people have This is going to sound very cynical, but why should people have faith in your ability to help, you know, really entrenched problems such as inequality when arguably you've had difficulty reaching both the inflation target and the full employment target for 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 it's the core of those two things that we think that the maximum employment objective and the stable price objectives are like a seesaw where you're trading each other off. An optimal monetary policy, those two things should be intention For the last ten 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 I 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 we're going to target black unemployment, and the black unemployment is our new maximum employment objective.

The challenges what does that mean for inflation? And if you will say, well, we're gonna get black unemployment down to four percent, which would be terrific instead of you know, 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 three percent 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 in the last ten years. We need to push the labor market as hard as we can until we get to our two percent 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 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 has talked about them, and there are lots in the media about how as labor markets got tighter, employers really did UM start to look to higher from pools of workers

whom they had previously excluded. So, for example, UM former felons that maybe wouldn't pass an initial green 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 UM, 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 early parts of the recovery. Absolutely no, I mean, trust me, I agree with that. 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 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 we can't just say, well, we're gonna 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 games 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 US for obvious reasons and inequality within the US, But I wondered if we could sort of turn our gays internationally and talk a little bit about how the FED is thinking about the international economics system.

To what extent 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 us financial cond 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 federates or system run lots of analysis and lots of scenarios of what what's happening in other economies, but it's always through the lens of you know, if the if the world economy does poorly, that's probably gonna 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 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 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 know you probably when you joined the Minneapolis FED, you probably didn't expect to see another categor plasmic economic crisis, but here we are, we have one, and so I'm curious, like, sort of what what what have been your experience observations going from the treasury side last time to be uh on the ffon and stay

this time. Well, you're right that, I mean, I just I can't believe it. I mean, I thought once in a lifetime, once in a hundred years or once in eighty years, would have an event like this. I can't

believe it's happening again twelve years later. You know. Interestingly, having lived through that on the front lines and remembering how scary the O eight 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 of Sorry, I don't mean to do media naval 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 debbish. You know, you worked at Goldman Sachs, you got hired by Hank Paulson

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 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 one of part of the reason that Chairman Bernanke and then Chare Yelling 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 They're just loud, angry voices in

the corner. They're not representing the American people. This is what I find. So I'm using I go out pre 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 streams, 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 I mean annoying, is that they're not representative of the American people at all. I also, my colleagues, do we meet with elected representative 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 gonna 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 that's what 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. Neal Cash Carr 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. Love, Thank you, Joe and Tracy. I really enjoyed it 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 pictures, So I

thought that was pretty cool. Yeah, and uh, the great thing about 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 big pivot 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 recorded this on August. It's

the day before Jackson Whole Um. So we don't know what's going to be announced there, whether there's going to be this big overhaul of the fense inflation framework, but that will be something interesting to find out, Yeah, something that I think it's interesting too. And even though Neil is not a trained academic economist, he still is a very much an adherent to this idea that there is this inherent or that there's um employment inflation trade off.

And so I think when people think about like, Okay, they're revisiting their framework, they're visiting 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 uh, 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, and 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, um and 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 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 errors, but I don't think it will. Fingers. These are pretty big questions. 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 Wisenthal. You could follow me on Twitter at the Stalwart. And you should follow our guest on Twitter, Neil cash Carr, president of the Minneapolis Fed. His handle is at Neil cash Cary. And if you're a angry Fed hater gold Bug, you should like show up at one of the meetings and like talking person and don't just troll troll online, but definitely follow him. He's a great follow. Follow our producer Laura Carlston.

She's at Laura M. Carlston. Follow the Bloomberg head of podcast, Francesca Levie at Francesca Today, and check out all of our podcasts under the handle at podcast. Thanks for listening