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Minneapolis Fed President: Systemic Racism Hurts the Economy

Two days after George Floyd was killed at the hands of police and as videos of his death circulated on social media, the president of the Federal Reserve Bank of Minneapolis, Neel Kashkari, did something unusual for an official in his position: He sharply and publicly denounced law enforcement actions.

The Fed is a famously tight-lipped institution when it comes to social issues, and most of its officials are not active on social media, so it was notable when Mr. Kashkari posted on Twitter that the killing indicated “institutional racism that is actively taught and reinforced.”

His colleague Mary C. Daly, president of the Federal Reserve Bank of San Francisco, followed two days later with a post stating that “hate thrives when people stay quiet.” And Raphael Bostic, the Atlanta Fed president and the Federal Reserve’s only black policy maker, published a June 12 post online decrying systemic racism.

The comments mark the latest stage in long-running evolution at the Fed, which has increasingly weighed in on societal concerns with an economic bent — like wealth and income inequality and job market disparities — in recent years.

In an interview with The New York Times, Mr. Kashkari, who joined the Fed in 2016, said he believed it was important to use his platform to speak up, and that race in America ties back to foundational economic issues, from who has the opportunity to obtain a good education to who has the resources to build wealth. Racial disparities, he said, are holding back workers from reaching their full potential.

Mr. Kashkari, a former assistant secretary in the Treasury Department who oversaw the Troubled Asset Relief Program, the $700 billion bailout that Congress passed in 2008, also discussed the lessons the Fed was taking from the financial crisis as it rushes to save a pandemic-damaged economy, and what dangers might lie ahead in the banking sector. The following is a partial transcript of that June 12 conversation.

JEANNA SMIALEK, Fed reporter for The Times: You wrote on Twitter that the fact that police treated George Floyd so violently while being recorded “indicates institutional racism that is actively taught and reinforced.” That is an unusually strong remark for a Fed president to make on a social issue. What prompted you to express your views?

NEEL KASHKARI: It was just an honest expression of my reaction. It had been in the news for the past day or so, and I’d seen it, and I’d seen other footage of black men being killed by the police, and I was struggling to figure out — why did this feel so different to me? And it felt so different to me because you could see, there were witnesses standing around the police officers and the police officers didn’t care. They were so confident in what they were doing, they were sending a message, that we’re not doing anything wrong.

I think I’ve just learned — if we don’t speak out about what we’re seeing, if everyone doesn’t speak out about what they’re seeing, then nothing changes.

SMIALEK: Do you think it’s the Fed’s place to weigh in on such matters, and, if so, why?

KASHKARI: I don’t think it’s the Fed’s place to weigh in on partisan political issues or picking sides Republican versus Democrat. But I live in Minnesota, I’m a voter in Minnesota, our employees live here. We live in our community, and if there are really pressing issues in our community, I think we have a responsibility to speak up. We’ve launched the Opportunity and Inclusive Growth Institute, we’ve already made a commitment that we’re going to do what we can to improve economic outcomes for all Americans. We’ve already said this is going to be an important issue for us, and then you have George Floyd being murdered in Minnesota itself — the epicenter of this — I think it’s totally appropriate for us to weigh in.

SMIALEK: Do you think institutional racism hurts the economy, and do you see that playing out in Minneapolis?

KASHKARI: If white children in Minneapolis had the educational attainment that African-American children have, this problem would have been solved a long time ago. I think racism is an undercurrent of the status quo, and then, you have huge chunks of our population who are not getting a good education, who do not have good job opportunities — it absolutely holds our economy back.

There are big chunks of our population whose innate human capital is basically being squandered because they are not getting an education that enables them to take advantage of their natural talents and gifts. That not only hurts them, that hurts all of us. It hurts our society and our economy.

SMIALEK: What role can the Fed play here?

KASHKARI: If we can use our economic research capabilities to analyze issues using the best data and evidence possible, and put forward policy recommendations that other policymakers can implement, that’s an important contribution for us to make.

The Fed has a big role to play, even if it’s outside of monetary policy, because people trust us as honest researchers.

(Mr. Kashkari has pushed for legislation in Minnesota that would make quality education a right in the state. The Minneapolis Fed is also conducting an analysis of what the impact would be of a local minimum wage increase, he said.)

SMIALEK: This isn’t the only thing on your mind right now, clearly. There’s a debate at the Fed right now about whether banks should be forced to conserve more capital as the pandemic continues, including halting dividend payments. You’ve been outspoken that they should. Why?

KASHKARI: The longer this crisis goes on, the more likely the losses roll up into the banking sector. When the virus crisis flared up, we didn’t know — maybe it will only be a two month crisis.

It seems very clear now this is a year, 18 month, even two-year journey that we’re on now until the economy fully recovers.

(Mr. Kashkari has called for a suspension to bank dividend payouts, and thinks that banks should raise equity instead. While the Fed Board in Washington could stop banks from making payouts, it has so far chosen not to. Officials have suggested that could change after the results of annual bank stress tests are reported on June 25.)

SMIALEK: The Fed is also a cornerstone of the government’s relief program for businesses and local governments. What lessons did you learn during TARP that should carry through to the current moment?

KASHKARI: We have to err on the side of being generous.

We tried to be very targeted in our assistance, helping homeowners who were deserving, who needed only a little bit of help. It ended up that we didn’t help very many homeowners and the housing correction was more severe than it needed to be. It’s better to be generous in your assistance, even if that means you help people who are quote-unquote not deserving.

SMIALEK: Will more be needed, especially on the fiscal side, and if so, what?

KASHKARI: I think more will be needed on the fiscal side.

Many of these jobs are not going to come back for a long time. Those workers who have been laid off are going to need to be able to pay their bills.

More focus on unemployment assistance for those jobs that are not coming back anytime soon, I think that’s going to be critical. Not only for the families themselves, but also for the economy as a whole. If people can’t pay their rent, can’t pay their mortgage, that’s how things start to spill over.

SMIALEK: When the economy does rebound, should the Fed pay attention to racial unemployment rates when it thinks about when to raise rates?

KASHKARI: I don’t think we have the ability to say “we’re going to target a reduction in this type of inequality through interest rates.” But I do think paying attention to these disparities gives us better insight into labor market slack in general.

“The fact of the matter is — the Fed raised rates too quickly and too soon,” Mr. Kashkari said, referring to increases that began in late 2015 as the central bank tried to make sure inflation didn’t rocket higher as the jobless rate fell. “We thought there was less slack out there than in fact there turned out to be. We have to learn from that. And how were we surprised? It turned out that there were more minorities who wanted to work, and more old people who wanted to work, than our models anticipated.”

“We need to understand the disparities,” he said.

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I.M.F. Predicts Worst Downturn Since the Great Depression

WASHINGTON — The International Monetary Fund issued a stark warning on Tuesday about the coronavirus’s economic toll, saying that the world is facing its worst downturn since the Great Depression as shuttered factories, quarantines and national lockdowns cause economic output to collapse.

The grim forecast underscored the magnitude of the shock that the pandemic has inflicted on both advanced and developing economies and the daunting task that policymakers face in containing the fallout. With countries already hoarding medical supplies and international travel curtailed, the I.M.F warned that the crisis threatened to reverse decades of gains from globalization.

In its World Economic Outlook, the I.M.F. projected that the global economy would contract by 3 percent in 2020, an extraordinary reversal from early this year, when the fund forecast that the world economy would outpace 2019 and grow by 3.3 percent. This year’s fall in output would be far more severe than the last recession, when the world economy contracted by less than 1 percent between 2008 and 2009.

“As countries implement necessary quarantines and social distancing practices to contain the pandemic, the world has been put in a Great Lockdown,” said Gita Gopinath, the I.M.F.’s chief economist. “The magnitude and speed of collapse in activity that has followed is unlike anything experienced in our lifetimes.”

The figures were released as the Group of 7 finance ministers and central bankers, who were supposed to meet in Philadelphia this week, held a virtual discussion on Tuesday to assess the global economic crisis.

In a joint statement after the meeting, they pledged to coordinate their efforts to restore growth, protect jobs and reinforce the global financial system. They noted that the I.M.F. was prepared to deploy its $1 trillion lending capacity to help vulnerable economies cope with recessions and they endorsed a proposal to let poor countries suspend debt service payments. The broader Group of 20, which is also expected to convene virtually this week, must still sign off on the debt relief plan.

“The scale of this health crisis is generating unprecedented challenges for the global economy,” the G7 officials said.

The United States is expected to take a severe hit, with the I.M.F. projecting that the American economy will contract by about 6 percent in 2020.

The global group was skeptical about the prospect for a “V” shaped recovery in the United States, suggesting that a sharp rise in unemployment and disruptions to supply chains will keep the economy below its pre-virus trend next year.

The impact is already evident in trade data, where slowing economic activity has caused global commerce to plummet. Tracking by S&P Global Panjiva published Tuesday showed global shipments of goods into the United States fell by 10.1 percent in March, the fewest number of monthly shipments since 2016. Consumer goods have been hit particularly hard, with shipments of furniture, apparel, steel and electronics falling by more than 15 percent last month compared with one year ago.

Ms. Gopinath said that the loss of global output would be “far worse” than the 2008 financial crisis and that policymakers were facing an unusual predicament in that traditional stimulus measures are little match for a pandemic that is being fought with shutdowns and quarantines.

“It is very likely that this year the global economy will experience its worst recession since the Great Depression,” she said.

According to the I.M.F., the global economic contraction from 1929 to 1932 was approximately 10 percent. Advanced economies shrank by 16 percent during that period.

Barry Eichengreen, the University of California, Berkeley, economist who is a scholar of the Great Depression, said there were several parallels between now and then. He pointed to the jobless rate in the United States, which he expects could top the 25 percent that was reached in 1933, and the global nature of the downturn, which could prolong the crisis as poor countries struggle to combat the virus.

While the Great Depression started in the financial sector and played out over several years, Mr. Eichengreen notes that the drop in economic activity this year has been sudden and the bottom remains unclear. But some of the spillover effects could be similar, he said, with skittish households increasing their savings and businesses growing wary of large capital investments. And as deficits soar, some countries could push for austerity measures.

“This is a different sort of Great Depression,” he said. “This is a different kind of shock and it’s playing out in different ways at a very different speed.”

Governments around the world are grappling with how and when to reopen parts of their economies in hopes of reviving business activity. President Trump is expected to make an announcement this week that could provide guidance for scaling back stay-at-home orders.

But the economic recovery is expected to be slow until people are confident it’s safe.

“Even if spending starts to bottom in April, we see little chance of a meaningful pickup in activity in the immediate future,” economists at J.P. Morgan wrote in an April 9 research note, noting that reopening could lead to relapse. “We don’t think that the bottom of the current downturn will occur until May at the earliest.”

Bank of America economists said in a research note that “the coronavirus will cause the deepest postwar recession in U.S. history,” predicting a 6 percent hit to growth for the full year.

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said a quick rebound was unlikely, particularly if people continued to worry about getting sick.

“We know after the Great Depression people carried the scars of that experience with them for many, many years,” Mr. Kashkari said in an interview on the “Today” show on NBC. “I think the longer that this goes on, the more people who are affected by it, the longer that recovery is going to be.”

That view is not monolithic. Another Fed official suggested on Tuesday that the shutdown was costing $25 billion a day in lost output, and that blanket testing should be made available to get people back to work.

“You really don’t want to go to the quarantine policy unless you have to,” James Bullard, president of the Federal Reserve Bank of St. Louis, said during a public event broadcast on Zoom. “The quarantine was maybe the right response initially, but we’re not initially anymore — so it’s not going to be the right response to come back with a global quarantine in the future,” and society shouldn’t “think in terms of rolling quarantines.”

He compared making widespread tests available to providing common goods, like eggs or cups of coffee.

“People say it can’t be done or we don’t have enough resources,” he said. “You really want to ramp that up at all costs and even if somebody gets rich off it or something, you still want to do it.”

Considerable uncertainty remains as the health of the economy will be dictated by the trajectory of the virus. If the pandemic persists into the second half of the year, the global contraction could be twice as severe and the anticipated rebound in 2021 could fail to materialize if additional waves of the virus spread later in the year, according to the I.M.F. Over the next two years, the pandemic could shave $9 trillion from global gross domestic product, or G.D.P.

In 2020, the I.M.F. projects the euro-area economy will shrink by 7.5 percent, led by steep declines in Italy and Spain.

Emerging markets and developing economies will not be spared, but in some cases they fare better. In China, where the virus originated and where draconian measures were imposed to combat it, the economy will expand at a sluggish 1.2 percent this year, down from 6.1 percent last year. India’s economy is expected to grow 1.9 percent, down from 4.2 percent in 2019.

Tentatively, the fund projects global growth to rebound to 5.8 percent next year. Barring the fast discovery of a vaccine or treatment, most countries are not expected to return to their pre-virus growth trends in 2021.

The fund calls for governments to invest in supporting their health care systems and ensuring that workers maintain ties to their jobs during lockdowns so that economic activity can resume when the virus recedes. In a press briefing that was broadcast online, Ms. Gopinath urged countries not to turn to protectionism and retreat behind their borders, warning that following such instincts could slow the recovery.

“It is very important that this does not become a feature where we reverse all the gains we have got from globalization,” she said.

Ana Swanson contributed reporting.

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