One on One with Gary Stern, President of the Minneapolis Federal Reserve Bank
Tuesday, June 09, 2009
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SUSIE GHARIB: For more analysis on the health of the nation's banking system, I turned today to a key Federal Reserve policymaker, Gary Stern. He's president of the Minneapolis Federal Reserve Bank and the longest serving policymaker at the central bank: 23 years. He retires this summer. My first question: Is it safe for banks to pay back those TARP loans?
STERN: I think the banks that are going to pay back the TARP loans are in a good position to do so. They have been able to raise capital in the private markets. In addition many of the credit markets are functioning a good deal better than they were just a few months ago. Overall I think it's fair to say we've seen some significant improvement in many financial conditions, although there are still some significant strains as well.
GHARIB: So Mr. Stern, did TARP do what it was supposed to do?
STERN: I think it did. I think the TARP program obviously helped to buy some time for financial conditions to strengthen and then I think the stress test came along and that turned out to be a very helpful in terms of reducing the uncertainty associated with the condition of many of these large institutions. I think it was very important to reduce that uncertainty and reestablish some confidence.
GHARIB: But even though you say all that, many people are concerned that with banks repaying this bailout money, that this could hurt the prospects for an economic recovery. What are your thoughts on that?
STERN: Well, you know, obviously the outlook remains uncertain, as it has for some time, but I don't think we're very far away from at least the initial stages of the recovery, because we're seeing some stabilization in some important components of spending and because we have seen improvement in the credit markets and because the inventory situation has improved a good deal.
GHARIB: So how close are we to getting to the recovery phase?
STERN: Well, I think in terms of the resumption of economic growth in the U.S. economy, we're probably very close, not many months away from a resumption of economic growth. And that has been my view for some time. In terms of more rapid growth and regaining previous peaks in economic activity, that's obviously going to take longer, in part because this was a significant economic downturn and in part because there are still strains in financial markets and there have been declines in house prices and in equity values, which do weigh on household balance sheets.
GHARIB: And it's also hard to see a recovery as long as people are still losing jobs. No one's really doing any hiring. What's the timetable for a job market recovery?
STERN: Well, the job market recovery is likely to take longer than a resumption of economic growth for at least a couple of reasons. First of all, there's precedence for that if you look at the two previous expansions that began in 1991 and in late 2001. It took a while for employment to increase. Secondly, we know that there are still industries that are contracting in our economy. So even if employment picks up, in parts of the economy it's going to decline in others and you kind of have a race between what's going up and what's going down and the declines may continue to win for a time.
GHARIB: So we've seen in past situations a jobless recovery, where employers are still laying off workers even though the economy picks up. Is that what we're in for this time?
STERN: Well, I would think that there's a reasonable probability, yes, that we'll see some of that this time as well. It's important to bear in mind, though that even when recoveries have started out in the so-called jobless frame as you referred to it, eventually we got very sizable expansions in employment, both in the expansion of the 1980s, in the 1990s and the expansion we had earlier in this decade as well.
GHARIB: Now, the Fed has done a lot to revive the economy. What more can it do?
STERN: Well, I'm not sure we have a lot more to do, because as I suggested I don't think we're too far away from at least the first stages of the expansion. Obviously we can increase the volume of some of our activities if we do need to do more, but I think that simply remains to be seen, if that's going to be appropriate at this point.
GHARIB: Do you think that a second stimulus package is needed?
STERN: No, in my judgment, at the moment, that is not needed. I think a little patience would be of value here. This has been a deep recession, there's no question about it. But I do -- the U.S. economy is very resilient at its core. It's fundamentally very flexible. I think we should let those virtues show through.
GHARIB: Now as you look at all the economic data that's coming in, are you more or less concerned about inflation risks?
STERN: I'm not terribly concerned about near-term inflation risks. The inflation numbers for the most part have come in largely as I anticipated. I do think looking forward -- but this is a ways down the road -- policy will have to be adjusted, not just Federal Reserve policy, but probably budget policy as well, will have to be adjusted to assure price stability in the long run, but I don't think we're at that juncture yet.
GHARIB: But you said earlier when we were talking that you see recovery just, you know, very nearby, in the coming months. If that's the case, won't the Fed have to begin raising interest rates and shifting its monetary policies?
STERN: Well, I don't think we have to shift policy at the first signs of recovery or even once it becomes apparent to the naked eye. But I do think that we will have to do that in a timely way and I would point out that if you look at the economic history of the United States over the past 25 years or so, we have for the most part had modest to declining, low inflation. So it's not an objective that cannot be obtained and it is one that with appropriate policy in my judgment will be.
GHARIB: Mr. Stern, thank you so much for coming on the program. We really appreciate your time.
STERN: My pleasure.
