Spooked by the coronavirus, investors worldwide have transferred their money to low-risk investments.
“That’s understandable,” Jerome Powell, chairman of the Federal Reserve, said Thursday on The Today Show. “But what that’s meant is that many places in the capital markets, which support borrowing by households, businesses — I’m talking about mortgages and car loans and things like that — have just stopped working.”
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Liquidity constraints are limiting access to credit, and the circumstances are exacerbating economic conditions that aren’t totally unlike a recession.
“We may well be in a recession, but I would point to the difference between this and a normal recession,” Powell cautioned. “There’s nothing fundamentally wrong with our economy. Quite the contrary. The economy has performed very well right through February. We've got 50-year lows in unemployment. So we start in that position. This isn’t something that’s wrong with the economy. This is a situation where people are being asked to step back from economic activity.”
They’re being asked to close their businesses, to work remotely, to stop their mall trips. It’s not a typical catalyst for economic downturn. Partly for that reason, Powell expressed confidence that controlling the virus will trigger recovery.
“You may well see significant rises in unemployment, significant declines in economic activity, but there can also be a good rebound on the other side of that,” he said.
When, exactly, that rebound comes is uncertain. “The virus is going to dictate the timetable here,” he said. The strength of that rebound is also in question.
“We don’t have comparable experiences to go back and look at,” Powell noted. “We know that economic activity will decline probably substantially in the second quarter, but I think many expect, and I would expect, economic activity to resume and move back up in the second half the year.”
What Can The Fed Do?
The Federal Reserve is trying to create conditions for a “vigorous” revival by keeping interest rates low and leaning into its emergency lending authority. Across the market, where credit has dried up, it can temporarily fill the gap by issuing loans and guaranteeing households, businesses and local governments access to credit.
“We’re providing relief, we’re providing stability, we’re trying to create a bridge from our very strong economy to another place of economic strength,” Powell said. “That’s what our lending really does.”
He expects the Fed to continue “aggressively” lending — limited only by the cushion it’s given by the Treasury Department.
“We’re required to get full security for our loans so we don’t lose money, so the Treasury puts up money as we estimate what the losses might be,” he said. “...It’s not a blank check in that we are limited by the ability to take losses, but I would say that effectively $1 of loss absorption of backstop from Treasury is enough to support $10 worth of loans.”
“When it comes to this lending, we’re not going to run out of ammunition. That doesn’t happen.”
In the end, the Fed can only do so much to assure economic recovery, and its role is more forward-looking. Powell points to legislative efforts — the trillion stimulus package passed late Wednesday — for more immediate economic relief.
When Should The Country Reopen?
President Donald Trump has made clear his interest in jump-starting the economy, regardless of the status of the virus. But Powell defers to epidemiologists on the best timeline to address the health crisis.
“I think the sooner we get the spread of the virus under control, people will regain confidence,” he said. “When that is the case, they will very willingly open their businesses up, go back to work, the consumer will be spending. So I think the first order of business will be to get the virus under control, and then resume economic activity.”
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