The Economy’s Outlook, Challenges, and Way Forward
September 30, 2020
New England Conference Massachusetts Bankers Association
Federal Reserve Bank of Boston
Key takeaways from Boston Fed President Eric Rosengren’s Sept. 23 remarks
- Takeaway: Rosengren’s forecast for the economy is less optimistic than his peers for several reasons, including a concern that a second wave of COVID-19 infections this fall and winter is likely. This could cause some states to impose new restrictions on mobility and sap the willingness of consumers to spend and invest.
Excerpt: “The biggest challenge to the economy, and the risk to a more optimistic forecast, continues to be our inability in the U.S. to achieve the public health progress on the virus seen in many other developed countries. … A full recovery probably requires the availability of vaccines and more effective treatments for the virus because until then, many businesses and households are unlikely to return to more normal spending habits.”
- Takeaway: Also, additional support to the economy from fiscal policy is very much needed but seems increasingly unlikely to materialize.
Excerpt: “Additional fiscal policy is probably the more effective tool at this time, since it can directly allocate money to firms and businesses most impacted by COVID-19 without requiring them to take on additional debt.”
- Takeaway: If infection rates increase this fall, financial spillovers from businesses impacted by the virus are likely to become a more significant headwind. For instance, even conservatively underwritten properties will face challenges if consumers are afraid to shop in stores and stay in hotels, and that will also impact the financial institutions that hold their loans.
Excerpt: I worry “about a ‘second shoe dropping’ that will particularly affect small and medium-sized banks, which provide a large share of commercial real estate loans and small business loans. A curtailment of credit resulting from such problems has caused serious headwinds to recoveries in the past, and may be a serious problem going forward.”
- Takeaway: Further improvement in the unemployment rate will be difficult to achieve until disruptions from the virus become less acute. The most likely labor market outcome is continued improvement, but with slower gains.
Excerpt: “Employment still remains below where it was earlier this year, even in industries that have recovered more significantly, so the path for further reemployment will not be easy – particularly if a second wave of infections makes consumers reluctant to participate in activities where social distancing is difficult.”
- Takeaway: Continued monetary stimulus remains necessary, Rosengren says, and the recent Federal Open Market Committee statement indicates the Fed intends to keep interest rates low.
Excerpt: “The statement highlighted that the federal funds rate range is expected to remain at the currently low level until three conditions are met. First, that the economy reaches maximum sustainable employment. Second, that inflation has risen to 2 percent. Third, that inflation is on track to moderately exceed 2 percent for some time. These three conditions come with a caveat that no risks emerge that could impede the Fed achieving its dual mandate – such as increased financial instability.”
- Takeaway: The Fed’s Main Street Lending Program can play an important role in the recovery by providing “bridge loans” to support firms that were profitable before the pandemic and expect to be profitable following it. Bridge loans can be scarce during crises for small- and medium-sized firms, and the Fed’s program enables banks to help communities avoid layoffs and bankruptcies by keeping credit flowing to local markets.
Excerpts: “The Federal Reserve recently provided new clarifying FAQs encouraging banks to focus on borrower status both before and after the pandemic when considering whether a borrower is appropriate for the program. We also published an FAQ that clarifies how the loan should be treated by bank supervisors, with all three federal regulators agreeing on the clarification. Hopefully, these developments will encourage some banks to more actively engage with borrowers impacted by the pandemic, using the Main Street program.”