As the coronavirus outlook continues to worsen, Congress is contemplating with what’s better suited to help small businesses: the Paycheck Protection Program or the Fed’s Main Street loans. Yahoo Finance’s Brian Cheung joins The Final Round panel to break down the details.
MYLES UDLAND: All right, earlier today we heard from Fed Chair Jay Powell on Capitol Hill, Brian Cheung, of course, following that action as always. And Brian, I think as we kind of digest what we heard from Powell last week and the Fed unveiling its new projections, we've heard a lot of Fed speak. You know, we had the long descend from Kashkari, Kaplan writing his piece as well.
There's been, at least in my view, over the last week kind of a messy period here for the Fed in terms of communications what they're thinking, what they're not. What did we hear from Powell earlier today?
BRIAN CHEUNG: Well, Powell definitely with nothing particularly new, given that we just heard from him last Wednesday in that FOMC press conference. But in his testimony to the House Financial Services Committee today, he did say that the economy has quote, picked up, but that the path ahead remains, quote, highly uncertain.
But the real headlines out of the press conference-- or rather with the testimony today, really had to do with the Federal Reserve's Main Street Lending Program. This is the Fed's efforts to provide loans to small to medium sized businesses, the concern here being that with the Fed Reserve only having lent out about $2 billion of up to $600 billion of capacity, just a drop in the bucket.
And maybe that program isn't that effective. Here's what Fed Chairman Jay Powell had to say about whether or not there are other alternatives to getting that support out to small businesses.
JAY POWELL: I really do, though, think that this is more appropriate for PPP loans, which are in the nature of grants. I think that's a better way to approach these. Trying to underwrite the credit of hundreds of thousands of very small businesses, it would be very difficult. And I think PPP is a better way to approach that space in the market. And I think you were well advised to use that.
BRIAN CHEUNG: Well advised to use that, that's about as strong as you'd hear from a Fed chairman in relevance to Congress congressional action, rather. Chairman Powell really saying here that Paycheck Protection Program loans are different from Main Street loans, and that they're forgivable, whereas the Federal Reserve, as we've heard time and time again, has lending powers, not spending powers, can't have grants like the PPP.
So Chairman Powell saying that might be the reason for the low uptake, although there is some debate about whether or not the Federal Reserve's Main Street Program loans are inaccessible, because the minimum size is $250,000, which is quite large, in addition to the fact that there are even some requirements that a lot of asset base companies simply can't meet, so a lot in the spotlight there, as Chairman Powell headed to the Hill today.
MYLES UDLAND: And then Brian, also thinking about the future here of Fed policy, we've heard, again I mentioned, the outline that Kashkari gave on medium of his dissent. We heard from Bob Kaplan, President of the Dallas Fed and the Wall Street Journal yesterday. And also we heard from Charles Evans earlier today talking about what the Fed may or may not do in terms of rate hikes as it relates to inflation.
And I just, again, when I think about what Evans said today, where we could hike rates, I guess, before we see inflation kind of really perk up. And then you hear what Kaplan said yesterday with respect to his concerns over financial markets. It is, at least in my view, amazing that we are kind of doing the same mid-2010s dance of really being hawkish at a time when there's essentially no justification for talking about rate hikes from Fed officials, though that seems to be all they're doing.
BRIAN CHEUNG: Yeah, Myles, you move on to 2010, and the question is, could the same thing happen here, where the forward guidance is kind of a little muddled, a bit unclear to the point where at some point does the Federal Reserve simply adopt another rule, like the Evans Rule, which was coined after the same person in question here, which is Chicago Fed President Charlie Evans?
The question here is really going to be with this new framework change. If we back up to the Jackson Hole conference, the idea is that the Federal Reserve will now be tolerant of inflation, of moderately overshooting its 2% target.
But here you have today a speech from Charlie Evans in remarks that came actually around the same time as Powell been speaking on Capitol Hill today, that maybe the Federal Reserve could raise rates before the Fed can declare mission accomplished on having average 2% inflation.
Now some people in the markets may have interpreted that as the fed could preemptively begin to raise rates, which may be simplified or rather maybe signal that the Fed could lift off earlier than markets had expected, based on Chairman Powell's press conference last week.
And I think that in summary, what this really underscores is the communication challenge that the Central Bank has with this new framework. And this is something that I had asked Chairman Powell in a press conference last Wednesday, which is that this is going to be an enormously difficult thing to message, not only to markets, but also to people on Main Street that ultimately drive inflation through their consumption or investment.
And I think that as the gates started to open, because Chairman Powell having had that press conference last week opened the door out of that Fed blackout, you have all of these 17 members of the FOMC headed out into the public making remarks, you do have the questions about whether or not some people are saying some things that could be misconstrued or misinterpreted in a way that another Fed speaker might be saying.
And I think that this could be headline risk for the Federal Reserve going forward. A note from Evercore ISI actually just this afternoon said that it really underscores quote, the need for fed leadership to flesh out its inflation overshooting strategy or risk losing traction on inflation expectations and financial conditions, something that, Myles, the Federal Reserve definitely doesn't want.
MYLES UDLAND: Yeah, and Brian, as you're talking, I just pulled up the transcript here, and I'm looking at Powell's answer to your question. In two sentences in, he starts to talk about the embedded expectation of future inflation implied in every interest rate, which obviously has nothing to do with what normal people would think about, which was your question.
So I think that speaks to the challenge Powell and other Fed officials have with explaining why exactly you or I would be excited-- well, maybe any person we could find on the street would be excited about higher inflation.
BRIAN CHEUNG: We all know how excited you get about it, Myles.
MYLES UDLAND: I mean, look, I could go all day on this, will not. We've already gone too long. Brian Cheung, thanks as always, for joining the show.