Former Federal Reserve Governor Randall Kroszner joins Yahoo Finance anchors Seana Smith and Adam Shapiro to discuss the upcoming federeral stimulus package.

Video Transcript

ADAM SHAPIRO: As our country struggles to face tough economic conditions and record unemployment brought on by the coronavirus pandemic, the Federal Reserve says it plans to keep interest rates near zero while continuing to expand its balance sheet. But at what point, perhaps, would the central bank run out of ammunition-- the quivers that are the arrows in its quiver.

To help us answer that question, we're joined now by Randall Kroszner, who is a former governor of the Federal Reserve and a member of President Bush's Council of Economic Advisors. Thank you for joining us. And very simply, it's not just the Federal Reserve, it's also Congress. And in both cases, something you said-- it was about fiscal spending, but would also apply to monetary policy-- you said, quote, "it's not just about spending more, it's about where is the best bang for your buck." So with the Fed, where's the best bang for the buck?

RANDALL KROSZNER: I think it's really important to consider that people keep talking about a number-- they want $1.9 or just some particular number. And you really have to think about, where are you training that firepower? And what is going to be the return to it? You have to worry about the return because at some point, debts have to be repaid. We have to think about the burdens that we're putting on our future generations.

So for the Fed, I think they're providing a lot of liquidity to the system, which is extremely important to make sure that the markets function appropriately, that they continue to be liquid and function well. And I think right now, they're in a good position to continue to do that. I don't think they need to do any radical changes in the short run.

SEANA SMITH: Randall, you mentioned the dead, I want to get your thoughts a little bit more about that, because that's the big debate, right-- whether or not the debt that we are racking up matters. How should we be looking at this? And I guess at what point should we start to worry about the debt?

RANDALL KROSZNER: Well, I think we have seen the longer term interest rates start to move up. It was below 1%, and now it's about 1.3%. That's still low by historical standards, for sure, but we do have to take into account that the markets are starting to become a little bit concerned about more borrowing. And that's understandable, because we spent 50% of GDP back in March and April of last year.

We've spent almost another 5% of GDP at the end of last year-- or legislated for that that has been spent over the last month or so. And so there's a question of, well, what is another 10% of GDP going to buy us right now? When you asked, where should we be focusing this? I think it really should be focused on health issues. I think that's really the key-- making sure that children can safely get back into school.

That's a very important long-term investment that has very good payoff. I think making sure that we have enough vaccines and the vaccines are rolled out as quickly as possible to the people-- really focusing on those, which, at the moment, are not that expensive-- they're nothing close to $2 trillion-- but I think would have an enormous bang for buck in saving lives and saving livelihoods.

RANDALL KROSZNER: You've also said, and it was just January there was a conference through the University of Chicago where you are an associate dean, that the Fed will need to continue to provide support, because it's more than-- there's that mandate about employment, but it's more than just creating jobs or moving people from one sector to another. Can you help us understand what that looks like in reality?

RANDALL KROSZNER: Sure. And so as I said before, they're providing liquidity to the system to make sure that, basically, the plumbing is working. It's stuff that's really in the background, and it's just like in your house-- you normally don't really think much about your plumbing, but if it backs up, it's a problem, and the house becomes uninhabitable.

And that's the same thing for the economy. If the basic plumbing of the financial system doesn't work, that's problematic. So I think it's really important for the Fed to continue to provide that support for the smooth functioning of the financial system to make sure that resources can be allocated around to where they're needed most. But the challenge is that the Fed in and of itself can't create the jobs or create the spending.

If there is a lockdown, if people are afraid to go out, if the virus is causing all sorts of tragic challenges for individual households, regardless of how much liquidity they provide, regardless how low interest rates are, that is not going to allow us to recover. We really have to get at the fundamentals of make sure that we can get the virus under control, that we can rebuild confidence, and then the liquidity support that the Fed is providing, the low interest rates the Fed is providing, can then provide the foundation for investment, for growth, for consumption.

SEANA SMITH: Now we also have President Biden, he's pushing a $15 minimum wage-- lots of talk about the impact of this. What do you think the economic impact of this would potentially be?

RANDALL KROSZNER: Well, it really depends where you are in the country. Because in some areas, effectively, the minimum wage is not very far from $15 an hour. And so large cities, let's say, like New York and Los Angeles, it probably wouldn't have an enormous impact, because wages are close to that. But in other areas of the country where wages tend to be lower, it's likely to have much more of an impact.

It's likely to make it more difficult to create as many jobs. Also, it tends to raise prices in the areas that use a lot of minimum wage labor-- so that's in the fast food industry, so prices tend to move up a little. So I think it really depends where you are in the country. And I think the key thing now is to get people back to work, and then we can think about whether the minimum wage should be moved up over time. But I think right now, we really want to get people back to work. And requiring a very high minimum wage, at least in some parts of the country, may make that more difficult.

SEANA SMITH: That certainly makes sense with just around 10 million Americans unemployed at this point. Randall Kroszner, thanks so much for taking the time to join us today.