Fed’s Powell Warns Against ‘False Starts’

Federal Reserve Chair Jay Powell Thursday explained more about how the central bank is remaking itself to keep intact the structure of an enfeebled economy and he joined the chorus of voices warning against returning to work too soon.

“Many of the programs that we’re undertaking to support the flow of credit rely on emergency lending powers that are available only in very unusual circumstances such as those we find ourselves in today,” Powell said in a teleconference organised by the Brookings Institution think-tank.

He added, the Dodd-Frank Act’s changes after the financial crisis now makes the White House, through the Treasury Department, more of a partner. Answering questions later he said that has been “a healthy” change.

Besides filling in details in massive programs to support small business operations and payroll and relieve stress in funding markets, the Fed later in the day formally allowed commercial banks to loosen regulatory capital requirements in order to extend more credit to business. The loans they will be extending can be classified as having zero credit risk since they are backed by the government, the Fed said.

“None of us has the luxury of choosing our challenges.” Powell said, “Fate and history provide them for us. Our job is to meet the tests we are presented.”

In the context of a pandemic, “One thing I don’t worry about is inflation right now,” he said.

Powell and his Fed policymaking colleagues have signed on to a “whatever-it-takes” effort that is hugely re-expanding the central bank’s balance sheet, underwriting and executing with Treasury asset buying support that goes beyond that used in the Great Recession in both scope and dollar amounts. In all, the Fed is taking on emergency tasks few would have associated with the Fed just two months ago.

Even so, many voices are calling for reassurance that the Fed, the Treasury and Congress are ready to do much more. The first small step in addition to Phase 3’s more than $2 trillion already provided is $250 billion the House and Senate have been asked to provide in the days ahead.

House Speaker Nancy Pelosi Thursday made clear she is demanding a special allocation of that amount, $60 billion, to be explicitly directed to the smallest businesses and even proprietors who may not have bank relationships.

Asked whether she would consider keeping lawmakers out of Washington through some remote voting setup she repeated, not any time soon. “A lot of people have to go to work” during the pandemic, she said.

The Fed’s latest expansion of its virus-response programs add up to $2.3 billion to the pot of money available in the form of loans, backstopped by Treasury, to a wide array of market participants and businesses. That includes markets for high-yield debt and municipal bonds and their derivatives, just about everything except shares in companies. The Fed loans have especially generous repayment conditions.

The Fed will take the PPP debt from the banks, allowing them to lend more than otherwise, through a special liquidity facility. It will also absorb another $600 billion in small and mid-sized-business loans.

Treasury’s Payment Protection program, with about a quarter of the resources provided in Phase 3, is offering forgivable loans to small business for operations and payroll and direct grants. It has disbursed more than $90 billion through Wednesday.

Of the Fed’s initiatives, “I would stress that these are lending powers, not spending powers,” Powell said, adding the indicated emphasis.

“The Fed is not authorised to grant money to particular beneficiaries. The Fed can only make secured loans to solvent entities with the expectation that the loans will be fully repaid,” he said.

Powell added his voice to that of philanthropist Bill Gates and the NIH’s Tony Fauci who repeated during the day their warning against a premature reopening of the economy. They and many other medical experts and governors say reopening too soon, before the medical infrastructure has been established to track those infected, would set the stage for a resurgence of the virus and a re-imposition of the economic shutdown.

“We do need to have a plan nationally for reopening the economy, what we all want to happen, as quickly as possible,” Powell said, answering a question.

“We all want to avoid a false start where we partially reopen that results in a spike in coronavirus cases and then we have to go back again”, to rigorous mitigation efforts.

The Fed will also increase the flow of credit to households and businesses through capital markets, by expanding the size and scope of what it calls the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF), as well as the Term Asset-Backed Securities Loan Facility (TALF). Together they will support up to $850 billion in credit backed by $85 billion in credit protection provided by Treasury.

State and local governments, having seen tax revenue postponed until at least the second half of the year, will be able to apply to Municipal Liquidity Facility. It will provide up to $500 billion in lending, with $35 billion in Treasury credit protection.

As to the new Main Street Lending Program, it will enhance support for small and mid-sized businesses “that were in good financial standing before the crisis by offering four-year loans to companies employing up to 10,000 workers or with revenues of less than $2.5 billion,” the Fed said. Principal and interest payments are to be deferred for one year.

“Generally my expectation is that the second quarter will be a very weak one,” Powell said. “That’s because businesses are shut down, workers are either working from home or they’re furloughed or laid off”, or they work for companies that had to close.

Yesterday morning’s tally of weekly layoffs, through claims for jobless benefits, showed 6.2 million off the job in addition to the previous week’s 6 million, without seasonal adjustment.

With the 15th of the month approaching, and with it the designation of a late payment, Powell said the Fed is watching the primary and secondary mortgage markets very carefully.

“The CARE Act does provide a moratorium on payments for some time for some mortgage holders,” he said. “The mortgage market is at the very centre of our of our economy and very important for the real economy. That’s why we bought so many mortgage-backed securities at such a historically aggressive pace over the last few weeks.”

“I wouldn’t want to say anything that diminishes the suffering that people are feeling at all,” Powell said. “It’s going to be a tough time.”

“But,” he continued, “if the government continues to give people the support that they need – that includes us, that includes Congress, other parts of government – and if people stay home and stay healthy until it’s appropriate to go back to work, and if the health care policy experts devise a plan for a good way to go back to work and reopen the economy – if we do all of those things there’s every reason to think that we can be back on the road to a recovery fairly quickly and that that can be a robust recovery.”

Denny Gulino

denny@macenews.com

www.macenews.com

Julie Ros

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