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Tags: fed | evans | covid | wave | unemployment rate

Fed's Evans Sees Less Economic Drag From New COVID-19 Wave

Fed's Evans Sees Less Economic Drag From New COVID-19 Wave
(Sasa Kadrijevic/Dreamstime)

Tuesday, 20 October 2020 04:15 PM EDT

The current rise in COVID-19 infections in the United States may not dent the recovery too much, Chicago Federal Reserve Bank President Charles Evans said on Tuesday, adding that he remains "reasonably optimistic" U.S. unemployment will fall to 5.5% by the end of next year.

"I sort of put less weight on the adverse economic consequences of a second or third wave based upon the experience that we've seen - so it would have to be even worse than what we see" to impede the recovery, Evans told reporters after a speech to the Detroit Economic Club. "We seem to be powering through this no matter how adverse and horrific those consequences are for households, families around the country."

More than 219,000 Americans have died from COVID-19, and daily new infections are approaching their mid-summer peak. Still, the economy has rebounded and Evans said he expects momentum to continue into next year.

What would force a downgrade for his outlook, he said, would be the failure of Congress and the White House to deliver further fiscal aid. His forecast assumes $1 trillion in new stimulus, he said.

Treasury Secretary Steve Mnuchin and Democratic House Speaker Nancy Pelosi have been talking about an even bigger package, but they have not reached a deal and, even if they do, the Senate's top Republican Mitch McConnell has said there is not enough support for it to pass. 

Among other Fed officials talking Tuesday:

- The Fed's actions to unfreeze credit markets had a significant effect on the corporate bond market, despite a small footprint, and the central bank would take a flexible approach to providing more support if needed, a senior New York Fed official said.

The announcement in March that the Fed would begin to purchase corporate bonds through its corporate credit facilities helped to calm markets and lower borrowing costs, ensuring that companies could access credit, said Daleep Singh, executive vice president and head of the markets team at the New York Fed.

"The ultimate goal of these facilities was to provide a bridge for U.S. companies and their employees to the other side of the pandemic shock," Singh said at a virtual event organized by the Chamber of Commerce.

The Fed purchased exchange-traded funds and individual corporate bonds through its secondary market corporate credit facility, and it reduced the scale of those purchases as markets improved, Singh noted. It stopped purchasing exchange-traded funds altogether in late July.

However, the Fed stands ready to increase purchases if needed and it would take a flexible approach, Singh said. It would focus first on "direct purchases of corporate bonds" and then purchase ETFs if there was "significant market stress," he said.

"By varying both the amount and type of purchases, we are able to provide flexible support to the market," Singh said.

Asked about the Fed's purchases of bonds from companies that are not struggling financially, Singh said the goal of the facility is to improve market functioning by purchasing bonds broadly and based on an index.

"What we ensure is that our purchases are conducted in a way that's neutral across eligible sectors and companies," he said.

- An overhaul of U.S. lending rules must boost incentives to promote affordable housing for low-and-moderate income families, a U.S. Federal Reserve governor said on Tuesday, touching on two issues which will take center stage if Democrats win on Nov. 3.

Lael Brainard said the pandemic-induced economic slump had underscored major racial disparities in access to affordable housing which should be addressed when the central bank overhauls the Community Reinvestment Act (CRA) in coming months.

The Fed said last month it would review the law, created decades ago to promote extension of credit to low-income communities and stamp out discriminatory lending.

"The core purpose of CRA remains as important as ever, especially given the national conversation we are having about racial equity in our society and the disproportionate impact that COVID-19 is having on (low-and-moderate income) and minority communities," Brainard told the National Housing Conference virtual meeting.

In 2019, the homeownership rate for Black households was 42.1%, compared to 73.3% for White households, a gap 3.1 percentage points wider than a decade ago, said Brainard.

During the pandemic, 25% of Black renters and 22% of Hispanic renters were behind on rent payments as of September, compared with 12% of White renters, according to Census Household Pulse Survey data analyzed by the Fed.

The Fed's CRA review aims to ensure the rules are still effective, while accounting for the way technology is changing banking. It has proposed changes to promote access to housing, including by scoring mortgages by number rather than size, and by reviewing the definition of affordable housing.

Brainard is seen in Washington circles as a leading contender for Treasury Department secretary if Democratic presidential candidate Joe Biden wins the election.

Biden has pledged to use financial reforms to address racial and wealth inequality, including by expanding the CRA and boosting affordable housing.

Brainard has sat on the Fed board since 2014 when President Barack Obama nominated her for the post through 2026. A moderate Democrat, she has resisted the Fed board's efforts to water down rules introduced after the 2009 financial crisis.

- U.S. Federal Reserve Vice Chair Randal Quarles said Tuesday that the market stresses created by the coronavirus pandemic showed the nonbank financial system is "significantly more fragile" than its traditional counterpart.

Quarles said that while decisive action from central banks and regulators helped ease market turmoil, recent events have shown global regulators have "work to do" to shore up nonbanks, including improving resiliency in money market funds.

Speaking in his capacity as head of the Financial Stability Board, Quarles did not lay out precise policy prescriptions, but rather said the global regulatory group is hard at work examining the issue and expects to lay out recommendations soon.

"Addressing vulnerabilities in the financial system going forward...will require a holistic perspective given the various linkages within nonbank financial intermediation and between nonbanks and banks," he said, according to prepared remarks. "We have gained some clarity regarding areas of the market that needed significant bolstering and have to look closely at whether and how resilience in these segments can be improved."

The rapid onset of economic lockdowns and market stress revealed some flaws across the market, he added, particularly as companies worldwide scrambled for cash, specifically U.S. dollars.

For example, margin calls appeared to be larger than expected for some firms, leading to stretched liquidity. And the stress raised new questions about the functioning and resilience of core government debt markets, particularly when it comes to the ability of private parties to intermediate in those markets.

Quarles noted that markets returned to normal thanks to massive intervention by central banks across the globe, addressing the immediate issue but raising longer-term questions.

"While swift and decisive policy action succeeded in calming markets, this does not mean that our work is complete. While central bank action succeeded in restoring market functioning, this support does not address the underlying vulnerabilities," he said.

© 2023 Thomson/Reuters. All rights reserved.

The current rise in COVID-19 infections in the United States may not dent the recovery too much, Chicago Federal Reserve Bank President Charles Evans said on Tuesday
fed, evans, covid, wave, unemployment rate
Tuesday, 20 October 2020 04:15 PM
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