By: Ellen Lamb, Government Research Analyst, GrayRobinson
This morning the Brookings Institution hosted a short online conversation with Federal Reserve Board Chairman Jerome H. Powell. Brookings President John Allen said that Powell and his colleagues had moved quickly and decisively to respond to the crisis with creative solutions. “We are in good hands” with Powell, he said, and he thanked Powell for the “powerful example of American leadership . . . you are an inspiration and an example to all of us.”
Powell first spoke from prepared remarks. He said that today’s challenge is different in scope and focus from previous challenges. This is first and foremost a public health challenge, he said, and medical workers are the ones on the real front lines. People have been asked to put their lives and livelihoods online, and we are moving to very high levels of unemployment, with burdens falling hardest on those least equipped to handle them.
The CARES Act is an important step, Powell said, providing relief to workers, small and medium-sized businesses, health care workers, and hospitals. Those decisions are falling to legislators, but the Fed can help by providing stability. He enumerated the steps the Fed has taken, including cutting interest rates to near zero and supporting essential credit markets. Market conditions have generally improved since the Fed took action. The Fed is deploying its lending powers to an unprecedented extent, and will do that until the economy is back on track.
He emphasized that these are loans, not grants, and the Fed expects these loans to be repaid. Some entities will need direct fiscal support. Once private markets and institutions are able to function normally again, the Fed will put its emergency tools away. “There is every reason to believe that the economic rebound, when it comes, can be robust.” The Fed’s current actions are meant to serve as a bridge to the other side.
Powell thanked “the millions on the front line” — not just in health care but in sanitation, grocery stores, security and other essential services.
David Wessel, Director of Brookings’ Hutchins Center, said it was important to celebrate the work of those who can’t stay at home. He asked Powell to look past the second quarter, which will undoubtedly be awful, to later in the year — might we see recovery in the third or fourth quarter?
Powell said, “It depends on the path of the coronavirus.” We don’t know how quickly the economy can reopen, and this is not a question economists can answer. “The second quarter will be a very weak one” because of the widespread closures. When the virus runs its course, there should be a quick rebound; most people expect that to happen in the second half of the year, but he wouldn’t speculate beyond that. The important thing is to get the virus under control.
Wessel described the Fed’s latest actions, including a new lending facility for state and local governments. Is there any limit to how much the Fed can lend without having unwelcome side effects, such as inflation or asset price bubbles?
Powell said they do this with the consent of the Treasury Department and fiscal backing from Congress, at Congress’s direction. They’ve been looking for places important to the real economy where credit has broken down. “We can keep doing that as long as those needs arise.” The law requires “unusual and exigent circumstances” and the approval of the Treasury Secretary.
Wessel asked again whether they aren’t risking inflation or asset price bubbles.
Powell said that many had feared that the Fed’s quantitative easing in 2008 would lead to high inflation, but that didn’t happen. In fact, inflation has been below target in the US and globally. “Honestly, it is not a first-order concern for us.” He acknowledged that they’re moving fast and “don’t have the luxury” of thinking through all possible consequences, but “one thing I don’t worry about is inflation right now.”
Wessel asked how the Fed’s actions have helped people who are out of work because small businesses such as restaurants have closed for an indefinite period. Powell said this is many people’s experience right now. The most important thing unemployed people can do is “stay home and stay healthy.” It’s also important for health care authorities to develop a plan to bring people back out of their houses safely. Powell said that the CARES Act will offer expanded unemployment insurance benefits to people who are out of work; getting access to that money might take a while, but unemployed workers are entitled to that money and will get it. The Fed’s role is to provide stability by keeping interest rates low and keeping the financial markets functioning, and to support a robust recovery when it comes.
Wessel asked whether we need to do a lot more on the fiscal policy side to address this crisis. Powell said the Fed doesn’t give advice on that, but in this situation, many people need fiscal support, not the type of lending the Fed can offer. Powell has heard both parties talking about additional support for small business lending, states, and hospitals. “Broadly, people are undertaking these sacrifices for the common good. We need to make them whole . . . this is what the great fiscal power of the United States is for.”
Wessel said that the CARES Act included a $450 billion backstop for Fed lending, and the Fed used $195 billion for various programs today. What are the Fed’s priorities for the rest of this money?
Powell said their priority for all of it was the same. In our economy, we rely on those who have funds to lend to those who are borrowing. When the virus hit, investors pulled back into the safest possible short-term investments, which meant that other credit markets dried up suddenly. That’s what the Fed’s powers are meant to address. They’ve announced nine different facilities to support the areas where they saw they needed to help. They might need to adjust some of these programs, or add more.
Wessel noted that several big banks have voluntarily suspended their stock buybacks, and asked why regulators haven’t directed them to suspend common dividends as well. Powell said that businesses distribute earnings to shareholders through both buybacks and dividends, and this is normal. The largest financial institutions do most of this redistribution (~70%) through stock buybacks. All eight SIFIs have stopped these buybacks, and a number of large regional banks have done so as well. They haven’t stopped dividends, but Powell doesn’t see a need for this right now; banks are much better capitalized than they were before the 2008 crisis.
Wessel asked about the mortgage market, which has seen a sharp spike in delinquencies, and noted that some mortgage servicers are struggling. Should the government take steps to prevent a mortgage crisis? Powell said the CARES Act provides a moratorium on mortgage payments for some borrowers, but he agreed that the mortgage market is at the center of our economy. That’s why the Fed bought so many mortgage-backed securities over the past few weeks. They’re watching the mortgage servicing situation carefully, and understand how important this sector is.
Wessel said that Mnuchin had just said this morning that he thought the economy might be ready to open by the end of May, as long as the President is comfortable with the public health situation. “Does that seem right to you?”
Powell said that wasn’t a judgment for the Fed to make. Health officials need to drive that decision, but “we need to have a plan, nationally, for reopening the economy.” He said what we need to avoid is a “false start” in which we go back to soon and cause a spike in cases. “We’re not experts on that here at the Fed.”
Wessel asked what the Fed will look at in considering whether to pull back its lending authority and start tightening again. Powell said the Fed moves “gradually and predictably,” and will want to see the economy well on its way to recovery before they pull back. The facilities are tentatively scheduled to stop lending on September 30, but if they have to go longer than that, they will. He pointed to how they ended quantitative easing over a full year as a playbook for how they will withdraw.
Wessel asked whether the Fed would consider a yield cap as we come out of this crisis. Powell said they’ve done a lot of thinking about what monetary policy might look like after the crisis. They think monetary policy is in just the right place now, and will keep it there until the economy has weathered the storm. Their principal focus is on the lending programs, making sure that credit flows throughout the economy.
Wessel asked whether Powell is worried about the Fed making decisions about who can borrow and who can’t. Powell said that during the 2008 crisis, the Fed was making those decisions, in consultation with the Treasury Department. Dodd-Frank imposed the requirement that the Fed consult with Treasury on these decisions, and Powell said that was appropriate. “There should be some accountability,” and some connection to elected officials. They don’t make decisions about individual firms, only about classes of borrowers. The Fed will not be choosing specific beneficiaries. Both the Fed and Treasury have authority when it comes to financial stability.
Wessel asked Powell to speculate about how the economy will be different when we come out of this; we’ll have a lot more debt, but how will priorities shift? Will some changes be permanent? Powell said their focus right now is on the near term. Behavior will change, he said, but not quickly. People will return to former activities — movies, travel, etc. — more as they gain confidence. This might be a short process, but it will be gradual, at least at first.
Wessel said that a lot of people are scared right now, and want to know that leaders like Powell are confident that we’ll get through this.
Powell said that this is and will be a very difficult time for many people: people who are sick, people who may be losing their businesses. But if the government continues to give people the support they need, and if people stay home and stay healthy, and if the health care policy experts devise a plan for return, there’s every reason to think we can be back on the road to a robust recovery fairly quickly. He quoted Bernanke’s recent prediction that if things go well, long-term effects of this shutdown should be modest.