CLEVELAND — A conversation with Loretta Mester; President & CEO of the Federal Reserve Bank of Cleveland.
On the steps surrounding the actions of the Federal Reserve to guide the economy through these troubled times:
“When the virus first came to the U.S. and people realized that this could be a very difficult situation for the country, the pandemic coming here, of course the financial markets reacted. There was a big pullback from risk taking and the Federal Reserve stepped in to try to make sure that the financial markets began to function well again and so that was when we went in and started increasing our purchases of Treasury securities and agency backed, mortgage backed securities because it's very, very important to have financial markets operating because they are the foundational element of not only the U.S."
On the steps surrounding the actions of the Federal Reserve to guide the economy through these troubled times:
“When the virus first came to the U.S. and people realized that this could be a very difficult situation for the country, the pandemic coming here, of course the financial markets reacted. There was a big pullback from risk taking and the Federal Reserve stepped in to try to make sure that the financial markets began to function well again and so that was when we went in and started increasing our purchases of Treasury securities and agency backed, mortgage backed securities because it's very, very important to have financial markets operating because they are the foundational element of not only the U.S. economy but the global economies.
“So when we saw that dysfunction in the markets and of the freezing up because of this pullback from risk taking it was important for the Fed to step in. We're also doing things under our emergency powers, they're call 13.3 facilities and they're authorized under the Federal Reserve Act Section 13.3 and these are facilities that really try to improve the flow of credit to households and businesses and so there's a number of facilities where again it looked like the markets weren't well functioning.”
“I think we have nine facilities that we've announced including the Main Street facility which the terms are being worked on now but also the commercial paper market again where there's this pullback from any risk taking and it looked like the market wasn't going to stay working.”
“Another set of actions we really have temporarily relaxed some of are sort of regulatory requirements from the banks because the banks were asking to take on a role of working with their businesses and with their retail customers and consumers to make sure that they're adjusting terms so that households and businesses can stay afloat through this.”
“The goal is to get to the other side of the bridge with as little damage, collateral damage as possible so that the economy once we get to the other side has a pretty good place from which the activity can pick up again. Now of course this is a very very hugely negative shock to the economy and there is going to be damage but we're trying to do our best at the Fed working with Treasury to make sure that the financial markets stay sound and credit flows to households and businesses that need it.”
On concerns about the slowing of stimulus money to people and businesses could have on the economy:
“So there certainly was some issues in the beginning when the paycheck protection program came on board, glitches in the system. There is an urgency here for all of these programs and of course really we know that there's a lot of pain being felt by households who aren't able to work, you saw the unemployment numbers and the initial claims today. We know there's a lot of pain out there and small businesses as well cash flow issues so there's a real urgency on the part I think of the Federal government but also of the Fed to get these programs off and running as well as possible.
So you're right there is some issue about the money getting to the small businesses. One of the things the Fed did do is again to try to support that PPP program is to do a PPP facility where we're adding liquidity so again enabling the banks to do more of that lending.”
“We're building a bridge to try to get households and businesses across to the other side of the pandemic shutdown period as that period goes longer we need a longer span of the bridge and we probably also need a wider bridge because more of the economy is going to be effected.”
Is the Cleveland region feeling any more or less of an impact from the current crisis?
"I think we're feeling as much pain as other parts of the country are feeling. You just have to look and talk to businesses.”
“Everyone is feeling and bearing the brunt of this. Firms that had every intention of keeping all of their employees on the payroll as it's gone on have had to furlough some of their workers. Supply chains have been disrupted so even firms who had orders have had to slow down some of their production if not cease it. This is just a huge unprecedented shut down of activity and you see it across all sectors, right in all parts of the economy which again makes it unprecedented. A lot of times you'll see a recession hit in one part much more deep than other parts but here you're seeing it across the board and while some companies I would say the luxury of having people work from home other parts of the economy are really shut down that don't have the ability to do that, some of the service firms, restaurants, hairdressers a whole swath of the economy has had to basically shut down.”
Will the Fed still have tools left to use on the other side of this to help down the road?
“We're constantly monitoring what parts of the economy still need help. We're constantly monitoring if markets are dysfunctional somewhere. I think market functioning has improved quite a bit since the Fed put on it's facilities but again that's all about helping Main Street, helping to make sure that credit flows to those who need it, in households and in businesses."
"We will have tools when we get to the other side. Hopefully when we get to the other side we will have done as a group as a country this investment that everyone is making in public health, we'll have a payoff on that investment in the sense that we'll be in a decent spot to begin reopening business and to reopening the economy and getting back to some semblance of normal."
“Now it's really about making sure that we get to that side with as little damage as possible so that when we get there we have a good basis for a recovery.”
How does this compare to what we went through in 2008?
“I think it's going to be a different scenario. This is unprecedented and as you say we as a country based on the best medical evidence decided that the best way to address the virus is to shut down activity, social distancing and stopping activity. That's different than in a typical recession where the economy was slowing down, the fundamentals were hurt, demand fell off because of that and then when you come out of that that looks very different. This is going to look different because as you say we chose to make to make this investment in public health.”
“This is different and the recovery is going to look different as well but it will take some time to get back as people get more confident that we have sort of the wherewithal to handle the virus and handle people as they get sick, I think it will take some time for that to come back but I do believe it will come back.”
