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Neel Kashkari: The Unemployment Rate

Jackie Hendry: The recent release of the April jobs report put the nation's unemployment rate at 14.7% and showed a loss of 20.5 million jobs during the month. Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, fears that unemployment rate is actually understated and that the real number is much higher. Neel Kashkari was a virtual guest for last week's Morning Fill Up hosted by Matt Ehlman of the Numad Group in Rapid City. He joins us this morning on In The Moment. Mr. Kashkari, welcome to the program. Thanks for taking the time to visit with us.

Neel Kashkari: Thanks for having me. It's great to be with you.

Jackie Hendry: So, I know news this morning, the Federal Reserve chair, Jerome Powell, suggesting that the economic rebound isn't likely till maybe even the end of 2020. In your point of view, how surprising is that expectation?

Neel Kashkari: I agree with the chairman. I mean, unfortunately, what we've learned over the past couple months has not been good news. The virus is dictating the course of the economy, and the virus continues to spread across the country. People continue to get it. Sadly, people are being hospitalized and people are dying. Ultimately, what's going to determine the pace of the recovery is all of us. When we all feel safe to take our families back out to restaurants, to movie theaters, to go back to the way life was like just a few months ago and until we feel safe, I think the recovery is going to be slower than we would like. So, I think as the chairman said we will see some economic growth toward the end of this year, but that's from a very low base given the contraction that we're now experiencing. It'll probably take a year or two before the economy returns to where it was before the crisis.

Jackie Hendry: Certainly, a lot of that we talked about the safety piece and also very basically that kind of unemployment piece. A lot of people are hurting right now. I want to turn to the April jobs report, as we mentioned in the intro around 14% unemployment. Tell us a little bit why you expect that number is actually higher.

Neel Kashkari: Well, yes. A couple of weeks ago, the unemployment rate came out, 14.7%, which is very high in history, much higher than it was. We had very low unemployment in February, 3.5%, but that 14.7% number understates the true magnitude of the job losses, because the way that survey is done, people have to actively be looking for work. If you answer the survey and you say, "I'm not looking for work." then you're not counted as unemployed. Well, many people lost their jobs and who are been sheltering in place. We've told people to stay home.

So, if they lost their job and they're staying home, they're probably not out there looking for work. So, they're not counted as unemployed. Then many others said that they're on furlough, essentially, meaning they think that their job has been temporarily suspended and they hope to go back at some point. The longer this goes on, unfortunately, many of those temporary layoffs are going to become permanently off. So, I think the real unemployment number is probably right now around 24% would be my best guess, just based on how many people have filed for unemployment insurance in the past couple months.

Jackie Hendry: Looking ahead a little bit. Are you expecting maybe that correction for that under reporting perhaps to come in the May jobs report when these furloughs potentially turn into those permanent layoffs or when should we expect to see the number be a little more accurate to what's probably really happening?

Neel Kashkari: Yeah, I think that's right. I think May and then the June report will probably unfortunately see that official unemployment number continue to trend higher. I mean, one small piece of good news and it's all relative is that the number of people filing for unemployment insurance has started to decline. Now, it's only, and I say that in quotation marks, only three million last week down from five or six just a few weeks ago, but that's a huge number still. So, there's still enormous pain that's being felt across the country and across the economy and no one is really being spared.

Jackie Hendry: Wow. We mentioned history, I wonder if you can put this in a little bit of a historical context for us people seeing headlines about highest unemployment since the great depression, for instance. How are we looking at this in a historical perspective?

Neel Kashkari: Well, that's right. This is the most extreme job loss that we've experienced as a country, since the great depression. The great depression had very high unemployment for many years. Part of the reason the great depression was as terrible as it was, was because policymakers did the wrong things. The federal reserve kept interest rates really high. There were tariffs that were imposed. Those made the downturn prolonged and much more damaging to the economy and to the American people. I think that we've learned from that and the federal reserve is acting very aggressively to provide support into the economy and into financial markets.

Even more importantly, Congress, Republicans and Democrats have come together and taken very aggressive action to support the American people to this pandemic. So, I am optimistic that we will not be in another great depression. I think we can bounce back much more quickly than the great depression, but it's still going to be a gradual recovery relative to what we thought maybe just a month or two ago.

Jackie Hendry: Probably the first when you mentioned aggressive response to the current situation, maybe the first thing that comes to people's minds and to my mind are the $1,200 stimulus checks that have been going out. I wonder, before we touch on what that money is actually doing for people, for folks who don't have a firm grasp on the federal reserve and how all this plays out. Can you talk a little bit about the relationship between the reserve and Congress and how they're maybe working together to try to right the ship a little bit right now?

Neel Kashkari: Yes. So, the federal reserve is our nation's central bank. We were created by Congress in 1913. Our jobs are to manage the ups and down to the US economy. If the US economy looks like it's overheating, typically we will raise interest rates to make it more expensive for someone to get a mortgage or to buy a car or for a business to get a loan, to expand, because we want to cool things down. If the economy looks like it's slowing or we're heading into recession, the federal reserve typically lower interest rates to try to make it cheaper to get a mortgage and boost economic activity. We want to make sure that the financial system is functioning so we can lend money out to financial markets to keep them moving so that businesses can raise the money that they need.

In contrast, Congress has the authority to tax all of us and to spend that money, they decide how much they want to tax us and what they want to spend it on, whether it's healthcare or defense or education or roads. The federal reserve, we are not a spending agency. We can just loan money, but we have to get it back. Congress has the ability to spend money. So, what the federal reserve has been doing is we lowered interest rates effectively to zero because of the crisis and we've been providing trillions of dollars of lending into the economy and in the financial markets to make sure the plumbing of the financial system works. In parallel with that, Congress has passed $3 trillion of spending, the checks that you talked about to families, small business loans that are going to be forgiven for many businesses, expanded unemployment insurance, that's all spending that Congress has put forward and it's very, very powerful.

Jackie Hendry: Any lender doesn't lend unless they have relative confidence in the ability to pay back. So, is that why we're seeing these interest rates going lower and these kinds of actions, because the reserve isn't too concerned about the ability to make up for what's going out right now?

Neel Kashkari: Well, we've intentionally lowered interest rates to make it cheaper. So, in theory, we could be taking more risk, but when we lower interest rates, we do it by lending money against for example US government bonds, treasury bonds, or government guaranteed mortgage backed securities. So, we're not supposed to be taking credit risk as they call it. In some of our emergency authorities that have been executed in the past couple of months, we are taking more risk, but we think that's the right thing to do to try to provide support to the US economy and to businesses while we navigate this downturn.

In contrast, when Congress says, "We're going to go spend a trillion dollars or spent $2 trillion." They're expecting that money all to go out the door and not to be recouped. So, that's a fundamental difference between what we call monetary policy, which the fed is in charge of and fiscal policy, which Congress is in charge of.

Jackie Hendry: Wow. Going back to those discussion of checks. From your perspective, is that money doing what it was intended to do and do we need more of the same?

Neel Kashkari: Well, I think it is. I mean, I find that the most effective way to help families and workers that have been laid off is to put money in their pockets so that they can pay their bills, whether that's buying food for their families or making a car payment or rent or mortgage. If we have millions of Americans and thousands of businesses that are effectively shuttered in because of the virus, they're laid off or they've got no customers right now, this could become a much bigger economic challenge if people can't pay their rent or can't pay their mortgage or the small business can't pay their lease, then that means that their landlord can't pay their mortgage and then it start to ripple through the economy. So, I do believe that Congress acted in a very smart manner, putting money in the pockets of people who've lost their jobs, just so that they could pay their bills for their own sake, but also for the sake of the broader economy, so it doesn't then start to ripple and hit more and more businesses and more and more communities.

Jackie Hendry: Do you think we need more of the same or can we expect more of the same in some of these additional packages rolling out?

Neel Kashkari: I think we may need more of the same. A couple months ago when Congress first designed this intervention, I think we were all more optimistic that this could be a short, maybe a month or two shutdown, clamped down on the virus, get it under control and then turn the economy back on, so many of these were meant to be short term bridges in a sense. Well, as we've seen, we have flattened the curve nationally on the virus, but it's still spreading. Millions of people probably still have it. People are still dying, so there's a risk that this shut down, some version of this shutdown is going to be longer rather than shorter and that means people are probably going to need more assistance to help them make ends meet.

Jackie Hendry: It's hard to imagine seeing how this will play out probably in the next year, year and a half or so, assuming that is in fact the case that that's how long the recovery takes and it seems likely at this point. I'm wondering if you can talk about, because certainly a lot of the more financially vulnerable folks are being hit the hardest by the situation. Are there additional solutions to really help out the folks that need it most?

Neel Kashkari: Well, you're exactly right. I mean, this virus is disproportionately targeting lowest income Americans who have the least ability to withstand it, because it's the frontline service workers who are mostly losing their jobs, whether it's at restaurants or bars or coffee shops or health clubs. In many cases, these are the folks who only recently recovered from the financial crisis in 2008. It took us more than 10 years to fully put America back to work after the financial crisis. They had just started to see their wages going up. So this virus and this health crisis is deeply, deeply unfair and who it is targeting.

I think the best thing that we could do as a country is to continue to put money in the hands of people who've lost their jobs. Since it's mostly lower educated, lower income people who've lost their jobs, putting money in their hands will be the best thing we can do to help them get through this crisis and get back to work.

Jackie Hendry: What are some of the other issues that you're seeing as far as how this pandemic is putting strain on or revealing other issues in our economy? What else is happening here?

Neel Kashkari: Well, the small businesses are so important to every community in our nation. They're also feeling huge burden right now, the coffee shops, the restaurants, the health clubs, et cetera. They employ millions and millions of Americans, and many of them have been shut. Now, when we're moving to reopen, and I talked to some in South Dakota. They want to reopen, they want to reopen safely, but if they have to really socially distance inside a restaurant where they have half as many customers or a quarter of as many customers, how are they going to make ends meet and is that a viable business model?

So, if we ended up seeing lots of bankruptcies of small businesses, that is not only going to hurt that firm and that community, that really means the recovery is going to be much slower, because if you have a vacant restaurant or a vacant coffee shop with an out of business sign on it, it's going to take a year or two before a new firm can take that space over and start up a new restaurant or a new coffee shop. So, we need to really focus on trying to help small businesses. The paycheck protection program was designed to do that. It was meant to be a two month bridge. I think it's likely many of these small businesses are going to need a longer bridge than just a couple months.

Jackie Hendry: For those of us who aren't business owners and maybe not feeling the worst of it right now, when we're looking ahead to the recovery, what should we anticipate in the aftermath? Are we looking at maybe taxes going up to recoup some of what went out? How does this play out after the fact?

Neel Kashkari: Eventually we will have to pay off this debt and taxes may be part of it. Also, just stronger economic growth can help so that the economy grows faster than the debt. There will come a time for that. For the next couple of years, we need to focus on the recovery, helping our neighbors and our fellow Americans to make ends meet until they can get back on the job market and have a good job and be able to take care of themselves. I think that if you are unaffected by the crisis, I'm very fortunate. I'm able to work from home. My income has not been affected by this. Try to support your neighbors. I try. We're eating in, we don't eat out very much at all anymore, but I do try to get take out a few times a week from neighboring restaurants just to try to provide them some business so they can try to make it through until we can get to a reopen safe economy where we can all be confident again.

Jackie Hendry: Before I let you go, Neel, I want to touch once more on, as we look ahead to the May jobs report, if people see we're already in a fairly historic rise as far as unemployment is concerned right now, what are your maybe key expectations for the May jobs report and preliminary notes for people for what they should do next?

Neel Kashkari: Well, I do think the unemployment rate, the official rate is going to continue to climb. Some people say 20%, some people say 25%. Whatever it is, it's likely to understate the true depth of the damage. We're also really paying attention to these weekly unemployment claims, how many more people claim unemployment for the first time. Ultimately, you and I, all of your listeners are going to determine how quickly the economy recovers. That's when we have confidence that we can be safe, that we can take our families back out to restaurants, to sporting events, to movie theaters, to church, and be safe. That means our healthcare system has to get control of the virus either with much greater testing with a vaccine or with a therapy so that we can all have confidence. That's going to be the key to getting our economy moving again.

Jackie Hendry: My guest has been Neel Kashkari, he's the president of the Federal Reserve Bank of Minneapolis. Neel, thanks for your time and your insight. We really appreciate it. Come back to In The Moment any time.

Neel Kashkari: Thank you for having me. I appreciate it.