Kashkari: U.S. Economy Trapped in ‘Very Muted’ Recovery
Caitlin Abrams

Kashkari: U.S. Economy Trapped in ‘Very Muted’ Recovery

Absent a strict lockdown to crush the virus spread, the Fed leader warns a weak economy could persist for a year or two.

Advocating a strict lockdown during the waning days of summer is controversial, but the Federal Reserve’s Neel Kashkari says it’s the sacrifice that’s needed to tame the Covid-19 virus and reenergize the economy.

In a TCB interview Wednesday, Kashkari, president and CEO of the Federal Reserve Bank of Minneapolis, said some business leaders understand a national lockdown is needed or else the U.S. economy will just limp along indefinitely.

Kashkari started hearing from businesspeople after a commentary by Kashkari and epidemiologist Michael Osterholm was published by the New York Times on August 7. The pair wrote: “We can continue to allow the coronavirus to spread rapidly throughout the country or we can commit to a more restrictive lockdown, state by state, for up to six weeks to crush the spread of the virus to less than one new case per 100,000 people per day.”

They argue that states lifted restrictions prematurely in late spring before the virus was under control, leading to the situation in which the U.S. “is now experiencing around 50,000 or more new cases per day.”

After he and Osterholm pushed for the lockdown, Kashkari acknowledges that he didn’t hear from any politicians eager to place a lockdown on their constituents. But he did get calls, texts and emails from another group. “I’ve heard from a lot of business leaders,” he said, and they concur that another lockdown needs to happen.

“Business leaders recognize we are not going to have a full recovery as long as the virus is raging out of control,” Kashkari said. “The people of Minnesota and the people of the country are not going to go back out” to shop and recreate “until we are comfortable and confident that the virus is under control.”

Until a vaccine is developed and widely available, Kashkari said, the U.S. economy will be in a “muddle-through scenario,” unless the nation’s infection rate can be lowered to levels seen in many other countries.

If the U.S. fails to take aggressive steps to reduce the infection rate, Kashkari said, “It’s possible that we just keep doing what we’ve been doing, in the next year or two, which is we just have this very muted economic recovery.”

He points to postponement of the Big Ten college football season as the latest evidence that the virus is still a major health and economic threat. He said: “Do we want to go back to normal where we can actually have sporting events, and we can have kids going back to school, and feeling confident that they are safe and that teachers are safe? That’s not going to happen until we get control of the virus and this is clear to business leaders.”

In a national survey conducted by the Pew Research Center, 69 percent of U.S. adults surveyed said they thought state governments had been lifting restrictions on public activity too quickly.

When asked to select the “more effective way to help the U.S. economy recover,” 73 percent supported “significantly reducing coronavirus infections to a level where more feel comfortable going to stores, restaurants, schools, and workplaces,” while 26 percent chose “opening up more stores, restaurants, schools, and other workplaces, even if there hasn’t been a significant reduction in coronavirus infections.” The survey was conducted July 27 to Aug. 2 among 11,001 adults.

Kashkari also is worried about the individual and overall economic fallout from the political stalemate in Washington, D.C. Congressional leaders and White House negotiators have been at loggerheads and unable to strike a deal on a major coronavirus relief package.

Federal unemployment benefits of $600 a week expired at the end of July, which had acted as a major safety net for people who lost jobs after the virus surfaced. There are sharp partisan differences over the appropriate level to extend those benefits to millions of Americans. There are many other unresolved issues, including aid to states and local governments.

Kashkari, Federal Reserve Chair Jerome Powell, and other regional Fed bankers all have stressed the importance of continued aid from Congress to address the financial needs of Americans.

“People need to pay their bills,” Kashkari said. “It’s not just for the sake of the family that has lost their job. It’s also for the economy.”

If people can’t make payments for their car, rent or credit card bills, he said, “it ripples through the whole economy, and then the downturn will be much, much worse.”

He labeled it “imperative” that jobless Americans get extended federal benefits. “I also think that state and local governments need assistance, because their revenues are getting crushed by the virus,” he said. Unless they have adequate funds to keep teachers, firefighters, and other public employees on the job, he said, government layoffs would be a “big drag” on the economy. “They need more support, not less support through this pandemic,” he said.