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Fed’s Rosengren Says Americans’ Confidence in Coronavirus Measures Will Determine Economic Damage

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.
Source: Dow Jones

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