CNBC's full interview with former Fed Chair Janet Yellen

[00:00:00] Speaker 1: So obviously we are in an unprecedented situation. How are you gauging the severity of the economic shock that we are dealing with as the nation shuts down? [00:00:12] Speaker 2: There are 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 just show a 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 have 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. [00:01:25] Speaker 1: On the jobs numbers in particular, I mean, you called it shocking, absolutely, to see almost 10 million unemployment claims in two weeks. How bad do you think those numbers could [00:01:36] Speaker 2: get in this country? Well, I think the toll 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 that our focus needs to be at this point on testing and trying to get the pandemic under enough control so that we can begin to restore business activity. But certainly unemployment could go quite a lot higher. I'm hopeful that 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 suggests that workers are still connected to their firms. And if activity can restart, that they'll be able to go back to their old jobs. [00:02:44] Speaker 1: People are wondering if this could look like a V or a U or a W. Do you have any sense of what recovery [00:02:52] Speaker 2: looks like? Well, a V, which is what we're all hoping for, is really a 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 that the outcome will be worse. And it really depends to my mind on just how much damage is done during the time that the economy is shut down in 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 have 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, 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 that we're seeing, and that may get worse, may leave companies. I'm afraid we will see bankruptcies. And companies may end up with debt burdens that make them unwilling to restore investment 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. [00:04:42] Speaker 1: Yeah, you've been warning about this corporate debt issue and the fact that so many companies 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? [00:05:02] Speaker 2: Well, I think we needed low interest rates in order to support employment in 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 a 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 in debt that we saw in nonfinancial corporations over the last six, seven years, or in the run-up to the 2008 crash, to be able to constrain the kinds of borrowing and debt buildup that households have. I'd call those macroprudential tools. And although I have been a fan of the Dodd-Frank reforms, I felt that that was a very important bill. We're really fortunate now, for example, to have a strong, well-capitalized liquid 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 leverage lending over the last several years that would have left corporations in better shape to handle a shock like we're seeing now. And I would simply say, I don't believe the regulators had those tools that are especially needed in a low interest rate environment. [00:07:01] Speaker 1: You alluded to the financial system obviously being better capitalized than where we were in 2008, though these 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? [00:07:16] Speaker 2: Well, I think the banking system is much better capitalized, has much better liquidity, is doing a much better job of understanding the risk that they're subject to. I think stress testing has been a tremendously important innovation. But there will be a lot of stress on banks. I think it's a lot of stress 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. [00:08:35] Speaker 1: 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? [00:08:44] Speaker 2: Well, I mean, I would be in favor of asking the banks to suspend dividends and stock buybacks. I know that many of the large, largest banks have said that they would suspend stock buybacks. Banks tend to be very reluctant to stop dividends and stock buybacks when they're -- because 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 on the grounds that we need a banking system that's 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 be able to meet the credit needs of the economy. [00:10:03] Speaker 1: Yeah, I think that they -- the bankers would disagree with you on that point. A number of them have said recently on our air that they will not be suspending dividends. They're in an entirely different shape than the European banks and that they feel relatively confident at this point that they can ride things out. [00:10:18] Speaker 2: I know. I've -- I've heard that. I mean, I still think it would be a better idea to do so. [00:10:25] Speaker 1: 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? [00:10:41] Speaker 2: 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 will 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 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 that's off, as you said, they have cut interest rates to essentially zero and are doing unlimited QE and interventions in the repo market. They're providing massive support to financial markets, and in turn to the economy. [00:12:03] Speaker 1: 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? [00:12:12] Speaker 2: 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. And 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's not allowed to directly own corporate debt. And most other central banks are. [00:13:19] Speaker 1: Yeah, I was just going to ask. I mean, if one of the goals is to stabilize the credit market, what about buying junk bonds? Is that something the Fed should be looking to get the authority to do? [00:13:29] Speaker 2: 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 priority 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. [00:14:09] Speaker 1: And while we're talking about policy support, you mentioned the CARES Act. I think you praised it. What else should Congress be doing? And 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? [00:14:30] Speaker 2: 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 and 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. I think state and local governments need more support from the government. I think state and local governments need more support. [00:15:38] Speaker 1: 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? [00:15:47] Speaker 2: 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 a lot 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 are 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. [00:16:55] Speaker 1: 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. [00:17:07] Speaker 2: So, I'm hunkered down at home with my family and telecommuting and learning about Zoom and other ways to stay in touch with people and continue to do my work. And 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 in 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. [00:17:56] Speaker 1: 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 do more, as you have outlined, needs to be done. What do you think about that kind of idea? Would that work? [00:18:19] Speaker 2: Well, you know, the federal government is going to have enormous deficits. They're already running at about a trillion dollars for this coming -- or for this year, before the fiscal interventions. And now we're probably looking at deficits well above $2 trillion. So, thinking about how to finance those, we're -- it's 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. [00:19:11] Speaker 1: 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? [00:19:37] Speaker 2: 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 a 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, if 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. [00:20:35] Speaker 1: Months? Years? What is a shorter order? [00:20:40] Speaker 2: Well, my hope is that, you know, there's likely to be some lingering effect that could go on for years, for the reasons I earlier explained, but my hope is that unemployment will come down to normal. normal levels pretty quickly.