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Fed’s Rosengren: Don’t Give Up Progress in Rush to Re-Open

US economic challenges reflect public health concerns, and it’s critical that progress on containing Covid-19 not be undone as businesses and other activities reopen, Boston Fed President Eric Rosengren said Tuesday.

“Public health solutions are paramount – without them, it will be virtually impossible to return to full employment,” Rosengren said in remarks for delivery to the New England Council.

“It is vital that the design and timing of reductions in business restrictions not result in worse health outcomes and higher unemployment over a longer period of time,” he said.

“While allowing employers to reopen will enable some people to return to work, it is not a panacea for our economic challenges, which again are rooted in public health concerns,” Rosengren said.

“The optimal mix of public health and economic policies is complex, making economic forecasts at this juncture unusually uncertain,” he said.

On the economic outlook, US unemployment is likely to peak at 20%, and will remain at double-digit levels through year end, Rosengren said.

One of the Fed’s key policy responses, the Main Street Lending program, is scheduled to get underway at the Boston Fed “in coming weeks”, and will provide key support for businesses that employ much of the US workforce, Rosengren said. Private sector lenders will underwrite the loans, and retain a minority stake in it.

“The program is aimed at lending to mid-sized and small entities that are too big for the PPP and too small for other emergency credit facilities,” Rosengren said.

“Enterprises of this sort accounted for a major share of US employment, and this program intends to make loans that support their ability to continue until the pandemic is contained and the recovery ensues.”

“An eligible lender will ultimately determine whether a borrower is approved for a loan, considering credit risk,” Rosengren said.

“Banks will underwrite the loan and the Federal Reserve will participate with the bank in the lending by purchasing 85 or 95 per cent of the loan, depending on the program facility. Hence, the lenders continue to have “skin in the game” to ensure that they will be motivated to certify the quality of the loan,” he said.

The loans mature in four years, have no interest or principal payments due in the first year, have an interest rate of LIBOR plus 3%, and may be prepaid.

Details on the lending program are available on the Boston Fed’s website, and more information will be forthcoming as launch approaches. Non-profit firms and asset-based borrowers are not now eligible for the program, but the Fed and Treasury are considering making them eligible, Rosengren said.

Rosengren said the Fed has acted aggressively to mitigate the economic consequences of the pandemic. “Preventing bouts of financial instability from having significant spillovers to the flow of credit to consumers and businesses is a vital crisis role for central banks, and the Fed has aggressively played that role during this very challenging period,” he said.

“The economic shock is an unprecedented challenge for economic policymakers including the Federal Reserve, where we will do whatever we can to support a return to full employment and stable prices – our mandate from Congress,” he said.

Julie Ros

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