June 02, 2020
W.L. Mellon Speaker Series: The Fed's Charles Evans Navigates the COVID-19 Crisis
Charles Evans (Ph.D. 1989), President and CEO of the Federal Reserve Bank of Chicago, spoke as part of the W.L. Mellon Speaker Series on April 14, 2020.
When Charles Evans (Ph.D. 1989) was appointed as the President of the Federal Reserve Bank of Chicago, he was fairly quickly confronted with a historic recession. "When I became President in 2007, I thought that I was pretty well prepared ... and then Lehman Brothers hit," he said, referring to the investment bank's 2008 bankruptcy filing.
Over a decade later, Evans finds himself leading the Fed through another financial crisis, this time set off by COVID-19. "I did not expect to go through another crisis of any similar proportion," he said. "It's really quite remarkable and unfortunate."
Evans spoke to the Carnegie Mellon University community via a Zoom videoconference as part of the W.L. Mellon Speaker Series. The W.L. Mellon Speaker Series enables students to interact with global leaders, CEOs, and management experts in forums that encourage insightful and lively dialogue. The informal coffee chat was led by Chris Sleet, H.J. Heinz Professor of Economics, and followed by a question-and-answer session moderated by Ariel Zetlin-Jones, Associate Professor of Economics.
Leadership Through Times of Crisis
Evans opened the event with prepared remarks focused on COVID-19's impact on economic activity and the Fed's response to the crisis. "We clearly are looking at very large losses in employment and national output," he said. "In order to support the much-needed flow of credit to households and businesses during these difficult times, the Federal Reserve has injected massive liquidity into the financial system, reinstituted many of the programs we used during the 2008 crisis, and added new programs in conjunction with support from the Treasury."
With these and other measures, Evans stated he is hopeful the United States will begin to recover in the second half of 2020 from the large economic losses due to the pandemic. "The economic fundamentals for the economy were really quite good going into this," he said. "There's this hopeful possibility that this is a temporary downturn." He cautioned, however, that "many, many things must go right in order to minimize the economic pain."
Following Evans' prepared remarks, Sleet and Evans engaged in a wide-ranging conversation. Unlike the 2008 crisis, the current one isn’t caused by financial distress. Today's steep downturn stems from steps taken to reduce the spread of COVID-19. Evans stressed the importance of following medical experts' and public health officials' guidance on lockdown policies and testing. "If we try to reopen businesses too soon, and then we have another wave, then it's going to be much more of a prolonged downturn, and that would be very, very costly," he said. "So getting it right early on is critical."
Evans advised Americans would need to come together to help carry everyone through the first half of this year. "We're only going to really survive to the second half of this year if everybody understands that loss is going to be taken by pretty much everybody," he said. "Some amount of forbearance so that everybody is better off in the future is going to be an important part." Once new infections have dropped to sustainable levels, he noted, that's when economists can begin to predict what growth will look like.
"Imagine if we had a shock like this 20 years ago," Evans posed, pointing out technology like the videoconferencing software he was using for this event. Economic activity has been able to continue to some extent in many industries as a result of the growth in work-from-home capabilities that online services support. Nonetheless, he observed bandwidth capacity can still be an issue for some activities.
Stepping away momentarily from discussing the pandemic, Evans also considered which technological innovations may affect financial markets in the future. He affirmed that the Fed is deeply interested in the state of fintech. Machine learning and artificial intelligence, he stated, would have a major influence on productivity and new product development. He said that the Fed has been investigating a real-time gross settlement system, creating opportunities in AI and analytics.
Evans also noted that the Fed is studying digital currencies. "I'm not exactly sold on it myself, but having said that, I do think that it's very important that the Federal Reserve study this and have a viewpoint on what the best path forward is," he stated.
Coronavirus Aid, Relief, and Economic Security Act
While Evans spoke, Zetlin-Jones monitored the text chat for questions from attendees, which he integrated into a handful of themes. One concerned how the federal stimulus actions might affect inflation. Evans said that the United States had used "shocking amounts of resources to smooth the downturn and avoid a recession," adding trillions of dollars to the national debt. "That's entirely appropriate, given that this has hit everyone in the United States," he said. "Everybody is at risk." But Evans isn't worried about inflation. "We've got other things that are much more important at the moment," he stated.
Another question focused on the potential for moral hazard in government bailouts. "There's so much funding at work, it's really important that the public trust be maintained," Evans said. Referring to the various emergency loan facilities that the Federal Reserve had created, he remarked, "It has to be a trusting environment, and we have to be able to verify that that's done in the proper way. Certainly the Fed is all about transparency and making sure that people understand why we're doing it and how we’re doing it."
For the last question, Zetlin-Jones asked Evans how he had called upon his personal experiences to address these two major economic crises during his time as Bank President. In thinking about the Great Recession, Evans remarked that, despite his training and experience, "it was challenging the entire time."
"What's really important is knowing that you can work with people," he shared. "Collaboration is unbelievably important."
He emphasized that one of the lessons he had learned about monetary policy in the past 12 years was "the importance of going big whenever risk management calls for it." Evans concluded, "We have to think bigger sometimes and take some chances."