Don’t Bet on a Quick Recovery

The president of the Federal Reserve Bank of San Francisco discusses the pandemic, the diversity crisis in economics, and monetary policy.

An illustration of Mary Daly
Getty / The Atlantic

As financial markets seized up and economic activity halted in the face of the coronavirus pandemic, the Federal Reserve took unprecedented action: It dropped interest rates to zero, bought billions of dollars of government debt, and set up an alphabet soup of emergency facilities to pump liquidity into the financial system. In some ways, that was the easy part. The central bank is tasked with keeping inflation in check and helping the economy achieve full employment. The country is now facing the most severe jobs crisis in 90 years, and the worst-off families are the hardest hit.

Mary Daly is the president of the Federal Reserve Bank of San Francisco. (She does not sit on the Fed panel that sets the country’s interest rates, but will next year.) As a labor economist and a policy maker, she has been vocal about using the tools of government to address financial inequality, and about the “diversity crisis” in economics.

We discussed this unusual recession, the limits of monetary policy, and representation at the Fed. This interview has been lightly edited for clarity and length.

Annie Lowrey: Early June brought some glimmers of hope that we might have a more V-shaped recovery. Employment and consumer-spending data seemed to show a strong rebound. Are you optimistic?

Mary Daly: I don’t see a V-shaped recovery. What I see is, as people are allowed to come out of their homes, some reengagement in economic activity.

People are going out because they’ve been sheltering for almost three months. They’re going out and putting a toe in the water. But they’re watching the news as well, and they may see COVID-19 cases spike, or continue to increase in some areas. We just don’t know yet how much persistent confidence we’re going to see in these communities. That will largely be determined by the virus and how much we have been able to mitigate its spread.

I wouldn’t be immediately jumping to evidence of a V-shaped recovery. Just to add to that, I’m not hearing from any of my contacts that a V-shaped recovery is what is before us. Some were holding out hope. But that hope has gone. And now people are looking for a recovery that is slow, but steady.

Lowrey: What do you see as the biggest risks weighing on economic activity as the economy reopens?

Daly: It’s the virus. We don’t know enough about the virus to accurately forecast with any confidence what’s going to happen.

My biggest concerns, right at the top: These pauses we’ve put in place—you’ve heard about forbearances on loans—ultimately, if we ask businesses to stay out of production for too long, these turn into insolvencies. Persistent pain. We’re all interconnected, so as these insolvencies emerge, then job losses that were thought to be temporary become permanent. Individuals are now dislocated and have to get back into the labor market.

The virus will determine a lot of it. But those are the two outcomes that I worry the most about: persistent job losses and persistent business failures.

Lowrey: Given that uncertainty, it seems like stimulus, whether it is monetary or fiscal, is not going to work in the way it might normally work. Stimulus doesn’t work against a virus. How do you make policy to fight a virus?

Daly: A shock came to our shores. Coronavirus is, first and foremost, a public-health crisis. And that’s how we responded to it. What do we need to do to ensure that we can continue to be healthy? We shelter in place. And we cannot stimulate the economy when we, for public-health reasons, have been asked to stay at home and not engage in economic activity.

That puts the government in a position of providing emergency relief: We’re trying to build a bridge over the coronavirus, so that people can make it through the coronavirus and be best positioned to reengage in economic activity when the virus is safely behind us. That is different from the things the government normally does.

I always have these things simultaneously in my mind: Do we need a longer bridge? If we build a longer bridge, what would it look like? And once we’re through with the coronavirus, how do we have faster growth, but also more inclusive growth? At the end of the expansion, we were really pushing on inclusive growth.

Lowrey: In this recession, the pain has been borne disproportionately by younger workers, and by black and Latinx workers. As a policy maker, how do you address that?

Daly: The impact of COVID-19, and this is true in health and economic terms, has fallen hardest on those who are least able to bear it. They just don’t have the cushion. They don’t have the resources saved up. This is true for people of color, communities of color, younger workers, workers with less than a high-school education or [at most] a high-school education. They’ve all been dramatically affected.

The thing that is really important, if you’re coming from a policy-maker perspective, is that we recognize that these disruptions were no fault of these individuals and that returning them fully back into the labor force and into economic life is our responsibility. That’s our No. 1 priority in my judgment. We can’t leave these workers behind and have it take another decade for us to get them back into the labor force and back into economic life and back into more economic security.

We need to commit to a maximum-employment mandate that is inclusive. That is not just about a fraction of our workforce coming back to employment, but [the idea that] every American who wants a job, gets a job.

Lowrey: What does that mean for Fed policy now? What does it mean for Fed policy to focus on the bottom half or quarter of the income spectrum?

Daly: When I think about this, I think about really achieving both of our dual-mandate goals of price stability and full employment.

We had not been able to achieve our inflation goal in the last expansion. We just grazed it. We never sustainably achieved it. We have room on the inflation front—that’s been shown. The lesson I take from that is we need to really work to get employment to its maximum level, especially with inflation so well under control.

We have the ability to be accommodative, to stimulate the economy once we’re past the virus. And to return us to a place where employers take a second look at individuals who have been structurally disadvantaged for decades.

Lowrey: What do you make of the calls to have the Fed target the black unemployment rate, as a tool for targeting full employment?

Daly: When we think about maximum employment, I think it’s a misnomer that we target an unemployment rate at all.

It’s one of the great lessons from the financial crisis is that it is incomplete to simply look at unemployment. I would say: Let’s be broader than that. Let’s look at labor-force participation. Let’s look at the employment-to-population ratio. Let’s look at wage growth.

Lowrey: You and some of your colleagues have highlighted the good that could come from not raising interest rates when the unemployment rate is low, but inflation is not rising. Before, you might have seen policy makers hike the interest rate to cool the economy off because of concern about asset bubbles, for instance.

Daly: If we are really good at assessing the risks of a bad thing happening, we tend to be less good at tabulating the good things that are happening, so we can actually make a good calculation about the risks and the rewards of a policy action.

Lowrey: You’ve talked about a more comprehensive understanding of economic health and marginalization. The Fed remains a more white and more male institution than the United States as a whole. Does the Fed itself need to change to reflect the country more broadly?

Daly: Ultimately, we make public policy. We are public servants. We should reflect the populations we represent. That’s the way you get the best ideas. As geeky economists, we think the policies we come up with are endogenous to the people sitting around the table. We need a diverse set of [policy makers] in order to spot the problems and create the best solution. That’s just a principle.

The Federal Reserve is making progress on those things. And in recent years, we had our first African American president. That’s a really important step, and, you know, I’m here and other women are in the policy-making group.

But we have to do more. In San Francisco, we have this mantra of inclusion and diversity, no excuses. It’s trying to flip this equation of how we achieve it on its head and not say “The pipeline is too limited” or “We really wish we would hire these people if they were available.” How do we ensure they are available? What do we need to do?

Lowrey: On inclusion, again: There’s a perception out there that the American government is able to marshal immediate, generous assistance for the financial system. But it has this halting, penurious assistance for families. Is that accurate?

Daly: The Federal Reserve has a specific set of roles that Congress has given us. We specifically have lending powers, not spending power. Congress is charged with spending, and our elected officials are charged with reflecting the views of the people they represent and then deciding what the appropriate allocation of our resources is. That’s the way our system is organized.

Both sides, the fiscal and monetary sides, took extraordinary action, really quickly [after the pandemic hit]. Unprecedentedly quickly. There were delays, but we are fielding some of the biggest efforts we have ever fielded in our history in short order. We’re all out in our economy one day and locked into shelter-in-place the next. That’s a lot quickly to put together.

We get this unprecedented shock that we have to respond to. In one way, it is frustrating because [the response] is slow, and I really am aware of the pain of that. I walk in my neighborhood in Oakland, California, and people stop me, who know who I am, and they say, “I still don’t have my UI,” or “I can’t get my [Paycheck Protection Program] loan.” And that’s painful. But at least it’s coming.

The other thing I will say is—this is something that I think is not completely understood in our country and our society—there isn’t a bright-line separation between Main Street and Wall Street. If we don’t help the financial-system function, if it doesn’t go back to functioning, then the interest-rate cuts we pass do not get translated to lower mortgage interest rates.

Lowrey: Are you concerned about the distributional consequences of having business die-offs concentrated among small and medium businesses? That might have bad consequences for things like wage growth down the road.

Daly: This is one of the most heart-wrenching things for me to watch. I see it in my own community. Small businesses, they’re really struggling, even with their PPP loans.

At some point, if you don’t have customers, or they don’t come back to the way they were, then you’re ultimately not going to be able to keep your business open. You’re going to have to close, and that has implications. It has implications for families. These are often family businesses who have had this business with them for generations, and they lose their livelihood. It affects the people they employed, of course.

I also worry about community health, community resiliency. Health in the broad sense of the word, because those small businesses are the epicenters of the ecosystem in a community. Something we’re going to have to deal with, and really need to deal with, is that we already had these inequities in our society, and the pandemic and the response to it just exacerbates them, makes them worse.

Lowrey: How does the Fed address that?

Daly: One of the things that we struggle with, and I know struggle with, is that in the end, many of these smaller businesses need grants, not loans. We’re a lending facility. We don’t give grants. That’s something the American people have to decide and push Congress to do.