Fed Warns of Widespread Business Failures

Federal Reserve officials warned the virus outbreak and a partial shutdown of the U.S. economy would result in a decline in the current quarter of historic proportions and risk the potential of massive bankruptcies that could create a lasting scar.

“You will get business failures on a grand scale and you will be taking risks that you would go into depression” if shutdowns persist, said Federal Reserve Bank of St. Louis President James Bullard.

Cleveland Fed President Loretta Mester noted similar concerns after outlining an outlook that included unemployment reaching or exceeding 20%.  “It isn’t difficult to imagine more pessimistic scenario,” she said.  That could happen, she said, if the virus isn’t contained effectively this year or “if there is considerably more harm in terms of business and personal bankruptcies or if instabilities in the banking system arise.”

Minneapolis Fed President Neel Kashkari warned of a “gradual, muted recovery” from the outbreak, while Dallas Fed President Robert Kaplan said the economy will need more fiscal stimulus if the jobless rate continues to rise.

Fed officials in mid-March cut interest rates to near zero and have unveiled unprecedented lending programs to cushion the blow from the pandemic. Even so, economic output may plunge by about 40% in the current quarter, Bullard warned, adding the government orders to keep businesses closed are unsustainable.

The decline will be “a staggering figure and way beyond anything experienced in the post-war era in the U.S.,” Bullard stated.  “We cannot hit the pause button for very long in major economies around the world, certainly not in the U.S. There’s a 90-day limit or shelf life on this policy, maybe 120 days shelf life.”

While shutting down the economy was appropriate in the early days as the U.S. managed the crisis, there now needs to be a shift to mitigating risks just as the country manages risks from terrorism or auto accidents, Bullard said.  “You will get too many business failures and really do lasting damage.”

Kashkari suggested any recovery will be slow with consumers and businesses continuing to be held back by health care concerns.  “We’re not going to fix our economy until we get our hands around the virus,” he said.

All three presidents said negative interest rates are unlikely to be a tool the Fed would rely on anytime soon.  Asset purchases are a more likely tool, Bullard said.