Fed's Rosengren Says Americans' Confidence in Coronavirus Measures Will Determine Economic Damage
02 April 2020 - 6:47AM
Dow Jones News
By Michael S. Derby
Boston Fed President Eric Rosengren said the central bank had
been working aggressively to limit financial damage from the
coronavirus shock, but that the scale of economic disruption would
ultimately be driven by when Americans were confident that
public-health measures had halted the spread of the virus.
"I'm able to do a fair amount of work from home, but if I'm a
waiter, I can't do that work from home. So until people are
comfortable going to a restaurant, those people are not going to be
reemployed," Mr. Rosengren in an interview Wednesday. "The sooner
we solve the health problems, the less likely we'll have severe
economic problems."
The most important steps to reduce any spike in the unemployment
rate will come from a robust regime to test and trace the spread of
the virus as part of a broader effort to restore confidence after
infection rates subside, Mr. Rosengren said.
Economic forecasting is difficult now because it is "very, very
dependent on the public health outcomes," he said. "How effective
are we getting people tested -- so you can be confident that if
you're on mass transit, you're not next to somebody who is likely
to be carrying the virus? So you feel comfortable holding the
subway pole?"
Over the last three weeks, the Fed has cut its benchmark rate to
zero, purchased nearly $1 trillion in government and
mortgage-backed securities and unveiled a suite of lending programs
to unclog dysfunctional credit markets.
Mr. Rosengren spoke separately Wednesday in a speech delivered
by video in which he underscored the importance of focusing federal
resources on the most vulnerable households.
"We are all being challenged right now, but our legacy can be
that we rose to the challenge and kept a focus on the vulnerable,
those with low and moderate income, and those whose livelihoods
operate on the thinnest of margins," Mr. Rosengren said in the text
of a speech to be given by video in Boston.
The economic-stimulus package passed last week in Washington
makes at least $454 billion available to the Treasury Department
for the purpose of absorbing losses on any Fed lending facilities,
which could enable the central bank to expand existing programs or
launch new ones.
Current programs have focused on high-quality borrowers, and any
decisions to extend lending to less creditworthy borrowers will be
"a Treasury decision, in part, about where they think the highest
value is, " Mr. Rosengren said in the interview. "We're creating
these facilities to leverage Treasury debt to try to minimize how
bad the unemployment rate shock is on the U.S. economy."
Fed officials have announced plans for a forthcoming lending
facility to midsize businesses, and Mr. Rosengren said launching
that program was a priority. "I think at that point, we need to
step back and ask, 'How bad is the economy?'" he said.
The Fed has focused its first wave of efforts stabilizing
markets typically considered havens, such as those for Treasury
securities and government-guaranteed mortgage debt. Forced selling
by investors looking to raise cash and unable to unload riskier
assets triggered severe volatility two weeks ago in those
markets.
It was "critically important that we get the Treasury market
operating in a way that people feel that they are confident they
can trade in fairly large volume," said Mr. Rosengren. "We're not
at 100%, but we've made an awful lot of progress."
Efforts to stabilize prices for mortgage-backed securities have
yielded some improvement, but volatility remains high, and it could
take one or two weeks before that market is stable, he said.
The Boston Fed is administering the central bank's program to
stabilize money-market mutual funds, which began seeing large
outflows more than two weeks ago, prompting U.S. policy makers to
backstop that market for the second time in 12 years.
Mr. Rosengren said the facility has been successful in stemming
outflows and shoring up investors' confidence.
In markets where the Fed hasn't been as active, "there are still
very difficult challenges being able to trade in any kind of large
volume without affecting the price," said Mr. Rosengren, who is
among just a few current Fed officials who served on the central
bank's rate-setting committee during the 2007-08 financial
crisis.
Mr. Rosengren said the Fed could have a role to play to help
reduce borrowing costs for state and local governments facing a
sharp increase in borrowing needs due to the public health and
economic crises, but that it would be important for Congress to
provide additional funding to states and local governments.
"The amount of support that was in the recent legislation will
not be enough," he said. "The Federal Reserve can make the
financing work more effectively, but it's not an effective
mechanism for doing transfer payments."
Over the long run, Mr. Rosengren said it would be important for
policy makers to avoid layoffs of public employees that occurred
during and after the 2007-09 recession. "States and municipalities
are going to need more support but I wouldn't necessarily expect
that support should only come from the central bank," he said.
Write to Michael S. Derby at michael.derby@wsj.com
(END) Dow Jones Newswires
April 01, 2020 15:32 ET (19:32 GMT)
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