Also, why a move by the Trump Administration to try and get more small business loans out to actual small businesses might actually do more harm than good
We’ve written a lot in praise of the heroic efforts of the Federal Reserve in reaction to the unprecedented economic crisis caused by COVID-19. Even as the Trump Administration and Congress argued over relief programs of their own. And then when they rolled them out, turns out one of the biggest—the Payroll Protection Program—is grievously broken. (We’ll get to that in a minute).
And we’ve lauded the superb and level-headed leadership of Fed Chair Jerome Powell. Powell has often warned the Fed’s powers are limited, even as he’s stretched those limits far beyond where the central bank has ever gone before. But now it may have just about gone as far as it can go.
Financial markets generally took as a positive that Federal Reserve Chair Powell committed in a video news conference Wednesday to keep interest rates at around zero for the foreseeable future. Powell also pledged to continue to all the programs the Fed’s put in place to support businesses and individuals. Especially those designed to keep the flow of credit going. Because even if interest rates are zero, if banks are afraid to lend money to anybody, it doesn’t matter.
And also and especially support for local governments, which has been a political hot potato. So for now state and local governments have only got the Fed helping out, and it may be that way for a while. (But the Fed can only really lend money, it can’t grant money, so only the federal government can really offer state and local governments long-term stability).
But we’re not so sure all that’s totally positive. Because here’s the thing: Powell’s using the words “continue” an awful lot. Meaning there may not be much more new the Fed can do.
Now, Powell did emphasize the Fed’s not constrained by certain dollar amounts, so that gives some flexibility. At the same time, the Fed cannot provide relief to companies or people or municipalities that are bankrupt.
“Will there be a need to do more?”, Powell asks rhetorically. He then responds: “I think the answer to that will be ‘yes'”.
So while Powell leaves room for more action on the Fed’s part in the future should it be necessary, he’s not specific at all about what options or facilities might be left. Click on the photo below to watch a clip:
There are also always big risks in the amount of debt far outpacing growth of the economy. Meaning the U.S. is taking on massive debt that if the economy doesn’t recover quickly it may not be able to afford. Although Fed Chairman Powell repeatedly made it very clear this is not the time to act on that concern. And he’s right about that. Also, this isn’t a unique situation to the U.S. right now; many other industrial countries are feeling similar economic jolts.
Read between the lines and the Fed even seems to be keeping an eye on inflation as the result of the huge amount of money the government is printing and spending right now.
Inflation happens when there are too many dollars floating around, chasing too few goods. So the goods become worth a lot more and the dollars become worth a lot less. And both the Fed and the federal government are flooding the economy with more cash than ever. There’s no inflation though, in large part because consumer demand for goods has plunged and also energy prices are low (partly because of lower demand too, but also partly because of a global price war). But there’s no guarantee it’ll stay that way. So the central bank has got to stay vigilant. (Especially with a President who has always been about throwing money up in the air and letting future Chief Executives deal with the long-term effects of that).
At the same time deflation is also a risk. That’d be if the economy enters a deep, long phase of decline and prices start falling because people can’t afford to pay for things. Less economic activity could lead to fewer jobs and lower wages, which lead to falling prices, which then results in even less economic activity. For that reason deflation is considered particularly dangerous.
So it seems like the Fed is taking a bit of a pause right now, at least. Until it has more visibility about which of the many paths the economy may follow in the coming months and years.
That’s reflected in some more of the Fed Chair’s statements:
“This is a new kind of uncertainty.”
“We’re clearly moving into areas where there is more risk than there has been in the past. And that’s OK. I think that’s what we’re supposed to do. This is a very usual time.”
“We are going to see economic data in the 2nd quarter that’s worse than any data we’ve seen for the economy.”
But Powell says he’s confident the economy could begin to recover even before a vaccine is found.
Meanwhile, the Treasury Department And Small Business Administration are trying to intervene to make the government’s Paycheck Protection Program fairer to smaller businesses. But there’s a big potential problem with what they’re doing. What they’re doing is shutting the nation’s biggest banks out during certain designated periods of time, so that smaller banks can come in and help the smaller businesses they typically represent get better access.
The problem we see with that? In big cities like New York, Boston, Los Angeles, and San Francisco, small businesses still very often use big banks to conduct their business, since they mostly don’t have much of a choice: big banks dominate the markets there. So while the government’s latest move might help out some businesses in suburban or rural areas (where a lot of Trump’s support has come from—coincidentally, of course), it might not help small business out so much in big cities (which are generally blue and don’t support Trump—also coincidentally, of course). In fact, it could make it doubly-difficult for small business in big cities to get loan money, because they’re already grappling with big banks that have far richer customers. And those banks have already privately loaned hundreds of millions of dollars to those fat richer customers, and will prioritize doing whatever they can to ensure those loans are paid back. So now the government coming in and limiting access for those banks might even further limit access to small businesses that need cash, at least in big cities.