Fed Presidents See Huge Pandemic-Caused Challenges

The presidents of the Richmond and San Francisco Federal Reserve Banks Tuesday saw huge challenges ahead as government virus response programs ebb, landlords without rent payments pressure banks, displaced workers stay unemployed, and customers get less enthusiastic about visits to bricks and mortar establishments as the pandemic hangs on.

Richmond Bank President Tom Barkin saw an “air pocket” ahead as the forbearance measures, the Paycheck Protection Program, enhanced unemployment benefits and other programs are dialed back and Congress decides what to do next. The resilience of the retail sector and “highly leveraged corporate debt” are additional concerns in the context of a need “to do more”, not less.

Government has to stay “very vigilant in the context of very real risks”, he said.

San Francisco Fed President Mary Daly said she is skeptical about how much remote working will persist after the virus is controlled, but said her headquarter city’s commercial real estate sector would be hard hit should firms find they can make do with a lot less office space.

Barkin and Daley are alternate members of the Federal Open Market Committee this year. Both participated in a webinar sponsored by the National Association for Business Economics.

Daly said the Fed is trying to assess a two-factor uncertainty, with both the magnitude and duration of the pandemic crisis unknowns, which is “hard”.

“We’re just in the beginning stages of this,” she said, without knowing “how much more damage will the economy suffer”? Among the unknowns is the extent to which customers will be inclined to keep returning in person to patronise businesses as the dangers of a persistent virus make themselves known.

Daly, a labor economist who was a protégé of Janet Yellen, a predecessor as head of the San Francisco bank, said there must be planning for the retraining of those displaced from their jobs by the virus and who will have to find new jobs.

The labour market, she said, is better than she thought it would be at this stage but “nowhere close” to where it was.

Barkin said he thinks advances in technology that are replacing human workers “is going to be a challenge for the labour market”.

Both Fed presidents doubted that tensions in the relationship with China, which predated the pandemic, will prompt a massive return of business operations to within the United States. Daly said companies are thinking more in terms of a “portfolio” of supply arrangements. Yet while suppliers will be more diverse, they may well be scattered elsewhere in the world, not necessarily to a domestic location.

Barkin said he hears a lot about relocating to Mexico, not to within US borders.

Neither president said accelerating inflation is a Fed concern, and just reaching the 2% target doesn’t seem to be getting any easier. A little inflation would be “a welcome thing”, Daly said.

Arguing against any boost to inflation are both the supply shock and the demand shock that exert downward pressure on prices, she said.

Barkin said the huge expansion of the Fed’s balance sheet is not an inflation threat with expectations well anchored and the low-inflation scenario so well entrenched. There is “very little risk now” of any “long shot” inflation problem, he said.

Barkin, a former McKinsey & Company senior partner, said he took “great comfort” from the results of the latest bank stress tests. But the Fed “can’t get complacent”, particularly as commercial real estate borrowers without lease and rent payments place pressure on bank lenders.

Barkin said the new high frequency economic data that has become available is “exciting” as it allows the big “battleship” of an economy to be seen “moving in real time”. He and Daly said they particularly like the credit and debt card weekly data on spending, which he said provides “unbelievably good” information, such as a drop-off in activity in the last week and a half.

Daly said she appreciates the way the card data allows tracking of travel and the degree to which spending skews lower and when it trends toward big ticket items, as well as the distribution of spending among income levels.

She said if forced to follow only one set of indicators, she would focus on sentiment measures. Barkin said he would favour unemployment and other labour market indicators.

Denny Gulino



Julie Ros

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