San Francisco Fed President Mary Daly speaks exclusively with Yahoo Finance’s Brian Cheung and Zack Guzman about the Federal Reserve's economic response to the coronavirus.

Video Transcript

ZACK GUZMAN: More news out from the Fed. Another day, another Fed lending facility to report. The Federal Reserve announcing this morning it would launch a temporary lending facility that will allow foreign central banks with accounts at the Fed to convert their holdings of treasuries into dollars as they continue to help address all of the market jitters that have hit here as coronavirus crises continue to spread across the country and across the globe.

I want to bring on Yahoo Finance Fed reporter Brian Cheung right now for more on that. Brian, if you're counting at home, this is number seven in terms of lending facilities we're now up to.

BRIAN CHEUNG: Hi Zack, yeah, this is the seventh facility that the Federal Reserve has launched. The details of it came out earlier this morning. The Federal Reserve announced that it would be establishing what they call a repurchase agreement facility. This is with Foreign and International Monetary authorities that have accounts through the New York Federal Reserve. They call it the FIMO Repo facility.

And what this basically does is it allows those other countries to actually swap temporarily any sort of US treasury holdings that they have for cash. And they hope that this will provide some relief to the US dollar funding markets, which we know have been strained over the past few weeks amid all the concern with the coronavirus globally. A lot of companies and lots of other types of institutions have been trying to bear down in hard US cash and have it be able to go anywhere to find it.

So the Federal Reserve's institution that it just put into place today hopes to provide some liquidity for that. As you mentioned, it's the seventh facility, the Federal Reserve continuing to try to combat the economic impact not just domestically, but also internationally with the facility today.

And the Federal Reserve obviously has come into view here and with all the actions that it's undertaken since the beginning of March. And we have the privilege of having with us right now San Francisco Fed president Mary Daly on the phone to chat with us a little bit about it. President Daly, are you there?

MARY DALY: I am. Thank you for having me.

BRIAN CHEUNG: Thanks for having us. So I wanted to chat with you a little bit about your district. So for those that aren't aware, the Federal Reserve has 12 different districts across the country carved out in different regions. So your region covers nine states, the entire west coast.

So you've heard about the stories in San Francisco, LA, Seattle. So I'm just wondering, based on the contacts and the conversations that you've had, what has been the effect of the coronavirus in your district and the economic conditions in the 12th district?

MARY DALY: Well, it's been what you've been hearing in the news nationally. It was a hard stop on economic activity. We were among the first states to be affected. You mentioned Seattle, San Francisco, LA. And the leadership in those areas basically went to shelter in place pretty quickly.

And so we had this hard stop on economic activity that is now being compounded by the fact that this is broad-based. It's across the globe. And travel, international and domestic, has come to a halt. Tourism dependent industries are now not working at all. Retail's not working at all, unless you're a grocer or a pharmacist.

And this has had a very big impact on our communities with literally millions of people losing their jobs. This is very similar to what we're seeing in the United States, and I expect it to get a little bit worse as we do the right thing and shelter in place before it gets better.

BRIAN CHEUNG: President Daly, we've had a number of estimates, and it's hard to estimate right now, but questions about whether or not we are already in a recession or headed into one, and to what degree and how deep that recession is going to be. First of all, is that your baseline forecast? And secondly, do you have any sort of projections on where unemployment or GDP might be for the US?

MARY DALY: So one thing that we all have to face is that the virus and solution will in turn determine both the magnitude of the downturn and its duration. And so predictions become very, very challenging to make.

What we do know for sure is that if we're not already in a recession right now, we will be. And I expect that we already are. You can't have millions of people losing their jobs and tens and thousands of workers being furloughed for an indefinite period without tipping the economy into a downturn.

The duration of that downturn will, of course, be affected by the evolution of the virus. And what we know from other studies of other pandemics is that if we do the right thing and shelter in place and curb the spread of the virus, the economy will be in the best position to bounce back.

So that's where I'm putting all of my efforts, is shelter in place, do the right thing, shore up, try to build a bridge for American families and households and businesses across the coronavirus, and put the economy in the best position to rebound once the virus is cleared.

BRIAN CHEUNG: So the federal government has really come into view with that big bill that was passed last week, signed by President Trump. It would appropriate $454 billion to the Fed and the treasury for a number of lending facilities. And the Fed has already telegraphed its intention to open up what they call a Main Street lending facility. I'm wondering based on the conversations that you've had, I mean, what might that facility look like. Or if it's still undergoing the works right now, what would you like it to look like?

MARY DALY: So it is undergoing the works. The Board of Governors is working hard on this. In fact, the entire Federal Reserve staff is across the entire system is working furiously, trying to put out the various facilities we've announced, see where else we may need to treat.

But let me back up for a moment from any particular facility and just talk about the overarching principles. There is an alphabet soup of facilities, you know, seven if you're counting. And then what they're all meant to do, though, is to provide liquidity in credit markets, in financial markets that are strained. And so that we're trying to work on the plumbing.

And what we're finding with each of these new facilities that we announce is that that's going to do another crack at the financial system that we need to fill and ensure that those markets have the liquidity they need to yield and do the basic lending and borrowing that is required. So those are the-- that's why we're doing this.

If you think about a Main Street facility, that's really meant to compliment the fiscal stimulus or the fiscal Emergency Act that was put into place, the $2 trillion act that said we're going to target directly small businesses with SBA lending. And we already have facilities that are helping big corporations through capital markets.

But there's this whole swath of institutions that don't access capital markets very easily and don't qualify for small business lending. And so if you think about that's a part of Main Street that still needs to be treated that directly employ, really, millions of workers in the United States.

BRIAN CHEUNG: Now with regards to addressing that, what other tools does the Fed have in its toolkit right now to maybe do that? The Fed has described its actions as, you know, being aggressive. But does the Fed have the ability to be even more aggressive? Could you see the Fed asking for a congressional authority to, say, buy longer dated corporate bonds, buy longer dated muni bonds? Is that something you would like to see? How aggressive, I guess, can the Fed get from here?

MARY DALY: You know, I want to go back to something I said earlier-- the virus will determine the timeline that we have, but it will also determine the amount of action we have to take. These are unprecedented times. And they call for unprecedented action. We've already taken unprecedented action. And I would want to say we would never do something or we'll definitely do something because we're dependent on the evolution of a virus which we don't control other than to listen to our public health officials.

So the main thing I want to convey to your listeners is the Federal Reserve is prepared to do whatever it takes within our powers to ensure that we're part of the solution of shoring up people over the virus, shoring up the American economy, and putting us in the best position to grow again once the virus recedes.

ZACK GUZMAN: President Daly, it's Zack Guzman here. I just wanted to jump in with a question in regards to those powers that you guys afforded yourself. It's interesting because you go back to the last FOMC vote that you participated in, in December of 2018. That was the vote that actually raised the target range, the federal funds rate to 2 and 1/4% to 2 and 1/2%.

Of course, the president has been very critical, others have been critical about maybe, potentially, that being too fast too quickly back then. But now looking back in hindsight, it had given you guys the ground to work with when we think about that first 50 basis point emergency cut that kind of ticked all this off and as you noted, the seven lending facilities since then.

But just that first room to move lower, in hindsight, looking back, I mean, do you think that that was critical enough to give you guys enough space to work with to kind of get this kickstarted here?

MARY DALY: So I'm of the mind that you need as much policy room as you can by ensuring that inflation achieves its 2% target and we achieve full employment. And I think we accomplished that. We had the interest rate set at the right level to allow us to achieve our dual mandate goals, which are given to us by Congress, and put the economy on a solid footing.

So I'd rather talk about we had the economy on solid footing, rather than, did we have the right amount of space, policy space. Because ultimately, the policy rate gets set to ensure that the economy achieves a dual mandate goal. The good news from my vantage point is, and what makes me optimistic that if we shore American households up and help businesses get through the virus, we will be well-positioned going forward.

What gives me hope is we were on a solid footing, a very solid footing with a very strong economy, 11th year of an expansion before the coronavirus. Then we get this massive shock, a pandemic, that affects everyone simultaneously.

It's better to have been on a good footing when that happens than on a weaker footing. That will give us the best opportunity once the virus recedes to continue to grow and to expand again and get American households and families back to work.

BRIAN CHEUNG: Another question, I guess, on that point is what more the government can do to make sure that there is the opportunity out there for people to get back into jobs. And one of them has maybe been infrastructure. And in fact, with the Fed having slashed rates to zero, you actually heard the president tweeting this morning, saying that he thinks now is the time for stimulus maybe in the form of infrastructure. He said that in a tweet this morning.

I'm wondering, do you think that more spending should be done now? How this kind of monetary policy create the fiscal space to try to, I guess, maybe counteract the economic impact of the virus?

MARY DALY: You know, what monetary policy does-- and it's a really good lesson in what the Fed's responsibilities are, which are both given to us by Congress. We were given these responsibilities by Congress. We are set to achieve the dual mandate goals by moving interest rates and other policies in order to stimulate the economy to get there.

We're also tasked with being the lender of last resort. And that's consistent with all the facilities we've opened. So what the infrastructure and other discussions rely on is the fact that we have cut interest rates to near zero. And that's in an effort to support the economy during the coronavirus and then add stimulus to the economy once the virus has passed us.

And if we choose to spend as a society on things like infrastructure-- I've personally been a proponent of that in previous remarks well before the coronavirus-- and building our physical infrastructure and our human capital infrastructure through education are the two best ways to ensure that we can grow faster going forward. I think that argument is as sound today as it was six months ago.

ZACK GUZMAN: Yeah, and President Daly, I actually think you're one of the better Fed guests we could have today as we're talking about this, too, because so much of your research had been focused on the labor market in terms of all the research that you worked on in years prior.

Looking at it, though, I mean infrastructure spending, there's a lot of concerns about the delay in terms of having people who might be out of work right now as we got those jobless claims numbers last week, who might be out of work right now, and wonder how long that delay might be.

How would you look at maybe an infrastructure spending bill versus other things that could be done on the fiscal side, in addition to all the leverage you guys are pulling up on the monetary side to make sure that we do get a recovery as quickly as possible here?

MARY DALY: So with these questions, I personally find it helpful to break things into the three buckets of efforts we have to make as a society. And the Federal Reserve plays a role in that.

So the three buckets are the first order of business is the public health. We have to follow the guidance for public health officials, spend resources on public health to ensure that we get the coronavirus under control, treat the, really, hundreds of thousands of people affected by this virus, and ensure that more people aren't affected. That's priority number one.

Priority number two, in my judgment, is we have to think about shoring people up during this time when the very thing we've asked them to do, we've asked American people everywhere to shelter in place. So they're doing the right thing, and it's their public servants' commitment and responsibility to ensure that we shore them up as much as we can during this period so that doing the right thing doesn't wreck your livelihood. So that's priority number two.

Then priority number three-- and this is where the infrastructure spending and other things come in and the Fed's commitment to keep interest rates accommodative until we re-achieve our dual mandate goals-- that's about what do we do once the virus subsides and how do we get Americans back to work. If people have been displaced, if jobs have been lost, how do we get those individuals back into the labor market so that they can take care of their families and participate in their communities?

BRIAN CHEUNG: President Daly, kind of wrapping up here, there's a lot nervousness out there. And you actually addressed this in a video address a few days back. You have conversations with businesses, people in your district all the time.

I'm just wondering if you can peel back the curtain and give us a little bit of insight into what you're telling them right now through this time. What are you reassuring them in terms of what the Fed is doing? And what do you have to say, I guess, to [INAUDIBLE] to the American people that are wondering how we're going to get out of this economic rut?

MARY DALY: So I tell my businesses, leaders, my community, my employees, and I'd like to tell the American people, we're doing exactly what you would want from us. As public servants, in my judgment, the Federal Reserve alone can't solve these problems. The federal government and local governments alone can't solve these problems. It takes all of us.

And the passage of the-- all of us are working towards the same goal. And the passage of the stimulus in Congress and the president's signature, the Federal Reserve taking these unprecedented actions, I actually see this as we are taking unprecedented actions in an unprecedented time.

And the thing I want to leave the American people with is while these actions are unprecedented, we're not unpracticed at them. We know how to do them. It's just that the scale is so much more vast. And so that's why you see, you know, every day, something new coming out, a new method to treat these problems. It's just to treat the scale of the problem. We actually know how to do this. And I think we have demonstrated as a collective that we are actively doing it.

ZACK GUZMAN: All right, there you go. San Francisco Fed president Mary David, thank you so much for joining us and taking the time to chat with us today.

MARY DALY: Thank you. My pleasure.