Outreach

April 16, 2020

Atlanta Fed president and CEO Raphael Bostic hosted the first session of a live webinar series about the Federal Reserve's actions and continued response to the COVID-19 pandemic. He explained the Federal Reserve's recent monetary policy actions and answered questions.

Transcript

Kim Tyson: Today we are honored to have Atlanta Fed president and CEO Raphael Bostic as our featured speaker. President Bostic will take a few minutes to explain some of the Federal Reserve's recent monetary policy actions, and then he will answer some of your questions that were submitted at registration. Welcome, Raphael.

Raphael Bostic: Thank you, Kim, and it's really good to be here. I want to thank you all for joining us. It is a pleasure to start this series and I want to thank my staff, to start, for thinking of this and thinking this would be a good thing to do. I wanted to spend about 10 minutes of our time together just giving you a sense of where we are and the picture of our thinking as we at the Fed and other places have really worked to try to respond to the crisis and get us to a better place. I want to make sure we have the bulk of the time to really address some of the questions that have been sent in. I want to thank all of you who sent any questions in advance. It really helps us stay focused and be clear on the things that you want to know about.

All right, so where are we to start? The numbers that have come in in the last couple of—I guess the last week, week and a half—have been pretty rough, but not so far from what we have expected. Unemployment claims have come in at around... I guess the number today was about five-and-a-half million. A week, two weeks before, we were in the six-to-seven-million-new-claims range. These are historic levels and as quite a reference, in the weeks leading up to the crisis, we were at about 200,000 new claims a month. So this is just a sea change in terms of its difference. Last month, in March, the economy had a loss of 700,000 jobs. That is a big change. That's pretty much the same as what we saw at the depths of the Great Recession and so this is a pretty significant hit.

The other thing I would say here is that in this first wave, what we've seen is a real industry-specific focus in terms of impact, where a lot of public-facing sectors have taken the brunt of the pain so far. So that would be things like restaurants, hotels, educational services, arts and entertainment, and we're starting to see some issues around manufacturing as well. And then the numbers that we're seeing coming in off of that across the sector are coming in quite weak. Retail sales are weak. We are expecting manufacturing numbers over the next couple of weeks to be the same. All of these are going to be continued over the next several weeks as the impacts of the response to the COVID crisis become realized in the data. And we're all living this now and so it's important to just understand that what these things are going to report are just going to verify the things that we know already.

So in terms of response, I would say that we are, at the Federal Reserve, viewing this as a public health crisis first. That's how I think about this. And so the biggest issue that we have is to make sure that as we go through the public health crisis, and make the response necessary to reduce the length of this pandemic, that we do all we can to make sure that the economy, and the U.S. economy, which was in a very stable place before, comes out of this crisis as close to that stability and solidness as possible. So pretty much all of the responses that we've done—I like to think of as relief or a support to try to keep our basic gears of the economy functioning as normally as possible. So at the very early stages of the crisis, first thing we did was reduce our fed funds rate to close to zero.

That was really designed to send a signal that when we get to the other side, the cost of capital is not going to be a constraint for businesses as they're trying to recover. And then we introduced a number of what we call facilities, all of which were designed to make sure that basic parts of the economy that we rely upon to raise capital, to get money, and to get households with income and cash flow keep functioning. So at the very early stages of this we started to see the Treasury market, which is the deepest and most liquid market in the world, start testing stresses to suggest that might be breaking down. We wanted to make sure we had the facilities to accommodate that. We saw that mortgage markets were starting to show signs of stress as well, as the spreads above Treasuries started to increase and so we thought it would be important to provide support for that part of the marketplace as well.

Then we started to see stresses on large corporations and the corporate credit markets. And corporations really access these markets, grew in the capital markets and investors. And so when corporations issue their debt through bonds, typically they get a lot of investors to buy them. The investors that were participating were asking for much higher premiums or returns than they normally do, which is another sign of stress. So we wanted to make sure that market was as normal as possible and have provided a facility to make sure there's liquidity there to make sure that corporations don't have difficulties raising capital. Of course, that capital and stuff they're going to use to pay for rents and salaries and the like. So we want to make sure that's sustainable. The nice thing—and the good thing, I would say—is that the support that we've gotten coming out, that we've offered, seems to have reduced some of the stress associated in those markets.

And we're starting to see those spreads come down, which I think is quite positive. And then since then, we've continued to look to see where there are other parts of the economy where we might see stresses. So you've seen us issue facilities around money market mutual funds, and also from municipal bonds. Those are really designed to try to keep the funding sources for public sector institutions as secure and stable and as robust as possible so that local and state governments can continue to provide the services that communities need.

You've seen us issue support for a Main Street Lending Program. That is really designed to target businesses, medium-sized businesses, those above the SBA [Small Business Association] limit up to $2 billion in revenues, up to 100,000 employees, to make sure that they still have the cash flows that they need to continue to pay their workers. And then we've also announced some support for the Paycheck Protection Program. And this is the program that I'm sure you're all aware of through the SBA that is providing support for small businesses, up to 500 employees, to make sure that they keep as many of their workers as possible on the payroll.

Now in addition to these things, all of these, I think, are really important to help businesses that were healthy and functioning well just up to the crisis go through, because the issue was not their business models, it wasn't that they were taking extra risk. Rather, this is a really unprecedented exogenous event, and we need to make sure that that outside shock doesn't destroy businesses and business models that have been lasting for a long time. And to that end, we've also engaged with the banks that we oversee and regulate and really encourage them to be a partner with small businesses and to help those businesses figure out how do we manage debt in a period where our revenues and cash flows may be zero or close to zero. So we really encourage our banking partners, and those who we work with, to find ways to work with their customers to provide forbearance and principle and interest. Maybe extend the term of the loan—just change some of the structures so that those businesses don't feel like there are these extra stresses that they have to face in the immediate time.

And I would also say that that runs through for borrowers and regular families and households as well. This is a time of crisis and this is a time where we all need to come together to make sure that we all get through this together. And I think that's the message we're going to continue to send. I continue to say this as much as possible. And I can say with a high degree of certainty that the banks that do those things are not going to be penalized for that in the future. These, we all recognize, are important steps to make sure that the pain that we're going through now does not become permanent damage when this crisis is handled.

Then the last thing I'll say before turning this over to the question portion is that, as I said before, it's really important to remember that this is a public health crisis first and foremost. And so a recovery and a renewal, revival will really happen only at a great pace—after we get that public health issue handled and into a place where we feel comfortable, where all of us feel comfortable, that we can go leave our homes, go to stores or go to the workplace and not be at significant risk of catching the virus, because we don't have natural antibodies for this. So if you catch the virus and you are left to whatever's going to happen, and so it’s my sense that we will not have a lot of confidence from consumers or from families or from anybody to go out and do the regular things that are associated with our basic economy, until that gets handled. So that's job one. That's our first and foremost focus, and should be. And then all of the things that we're doing are really to support all of us as we do the appropriate responses to get this under control.

Let me stop there. Well, let me say one other thing and then I'll stop, which is we continue to monitor the marketplace to see if there are places where those stresses that I mentioned before are starting to emerge, and we continue to think hard about whether there are pools that we have at the Federal Reserve that might provide some relief and some support for those. And I will, if I see those stresses, strongly encourage us to jump in and provide that support, help those segments of the economy, and get through this with as little damage as possible.

Let me stop there and we can go to questions.

Tyson: OK, wonderful. Thank you so much. As you said at the beginning, we did have numerous questions submitted at registration time, so we will not be using the live chat feature to take questions during today's session.

So the first question is: How long will it take for this economy to come out of recession after we go back to work? How do you see the shutting down of the economy to slow the spread of the pandemic affecting real GDP [gross domestic product] growth, inflation, and unemployment in the near to medium term?

Bostic: Well, in the near term, I think it's pretty clear that we're going to see a significant hit to growth, to GDP, to all those things. And that's fully expected. If you go to social distancing posture, that means that a lot of the discretionary spending that families might do is going to go down or disappear, and that will mean that demand for a lot of businesses across the economy will fall pretty significantly. That's going to have a short-run hit and that's fully expected. I think the bigger question, and it is an unknown, I have to say, is, how fast will we be able to turn that economy back on? As I closed that last segment, my opening remarks, with a lot of—that depends on the public health response and then a lot of it also depends on how businesses respond in terms of changing policies and practices to create that safety and that security for workers and for customers.

So I know here at the Federal Reserve, we've been on work-from-home [status] since the middle of March, and I actually just got off of a call where we started to have conversations about what are the list of things that we're going to have to consider in terms of changes? How people get into the building. Is it how the cafeteria is laid out? Is it things that we need to put in place on an elevator or in the hallways? These are all questions that business leaders and merchants are going to have to manage and understand because if a potential customer goes into a store and sees things that make them nervous, they're not going to stay there. So we all are going to have to work on this. And I know from my perspective, I'm not going to ask my staff to come back and amass until I feel like we've got answers for those things that can give them confidence.

So in terms of timing, I saw that there's a model for Georgia that would suggest that our peak is going to be somewhere around May 1st. If that holds, then we should be in a place to really be considering reopening sometime in the mid to late summer. And so I'm really looking at the third quarter at the time. Start to see the wheels start to roll again. But as you know, there's a huge variation in this. I was talking to an elected official earlier today and they said they're breaking up maybe a little later. Others, like folks in the Administration, are looking to move a little sooner. All right. Now I think it all really depends on the nature of the public health response and how we change our policies. But I know this has got everyone's attention. I'm hopeful that that attention will mean that we find answers sooner rather than later.

Tyson: OK. Well, number two is: Why does liquidity from the last recession cause a higher inflation rate? How do you think this new infusion of liquidity into the financial system will impact the inflation rate in the U.S. in the next year?

Bostic: Well, inflation has been something that has been something of a puzzle for quite some time, for at least 20 to 30 years. And what we've seen over that time is a real secular reduction in the natural rate of interest, which is probably more technical a term, but how people are viewing the cost of money over time. And if that's gone down, that means that inflation is going to be lower. And so what we've seen in the question you mentioned, that our quantitative easing, which is our buying of bonds and securities that occurred during the great recession, did not translate into-

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Tyson: Some people are saying that the Fed's policy moves will a) ultimately come from taxpayers and b) ultimately add to the national debt. Is there any sense in which either of these are correct?

Bostic: Well, I would say on the first point, some of this response is coming from taxpayers in the sense that many of the facilities that I mentioned can only be stood up if there is a pledging of collateral from the U.S. Treasury for any losses that might accrue. And so we call those 13(3) facilities, and all of those have some backstop from public funds. I would say that the CARES [Coronavirus Aid, Relief, and Economic Security] Act included provisions for this. And so we're working at the direction and with the full authorization of Congress. And that's an important thing for everyone to keep in mind. In terms of national debt, I think a lot of this depends on what happens in the future. So you'll recall in the Great Recession there were funds that were provided to a number of companies. The TARP {Troubled Asset Relief Program] money went to banking institutions, large bank institutions.

We recouped all of that money and, in some instances, recouped quite a bit more. I know that Fannie Mae and Freddie Mac remitted back to the government millions and millions of dollars more than they received in terms of assistance. So part of what we're thinking about, and what we have to be mindful of, is whether the response is sufficiently strong to cover the expenses that we incur. And also to what extent are their losses associated with those loans. So the PPP, the Paycheck Protection Program, is really trying to help keep small businesses alive. If that doesn't happen over the long run, then there may be losses there and that will have to go onto the accounting. But the other thing I would say on that is that for me, it is more important that we do everything we can today to save as many businesses as we can.

It'd be a terrible story in my mind if, two years from now, people say, "Oh, but the debt’s lower, but we lost a third of our company." I think that that priority is a little backwards. We need to do all we can to save companies, save families, and keep them out of deep, deep hardship and desperation today, and then deal with whatever we have to deal with in the future. And so that's been the order of my thinking in terms of a response, and I think that's the right way to go.

Tyson: This question comes from a seventh grade civics teacher. The common questions my students ask is, why isn't the government just printing more money and giving it out? How would you answer a 12-year-old student?

Bostic: Well, I think to some extent, we are doing that by going into debt, by spending extra money, and finding ways to finance it. We are saying we're going to get a much larger supply of dollars into the economy. I think the second part of the question is, really, how do you do that most effectively? Do you give it directly to families? Do you give it directly to businesses? Do you give it to parts of government? And I think what we've seen in terms of response is, really, all of the above, right?

So we at the Federal Reserve Bank of Atlanta have played an integral role in making sure that families get those $1,200 checks that were authorized through the CARES Act. I mentioned the PPP and the Main Street Lending Program—t`hose are designed to go directly to businesses as support, and we are also working with governments through our Municipal Facility and the Money Market Facility to make sure that there are funds that are going to those as well. So I think we are seeing a significant deployment of funds that were not originally available. So I would say the seventh-grade class you're seeing a very energetic and active federal government and the Federal Reserve. I think we've done an unprecedented number of things in a very short amount of time, and you will be able to continue to see that as we move forward.

Tyson: Well, somewhat related to what you just spoke about: what steps is the Fed taking to ensure the money is going to the purposes intended, and how are we making sure that the money is getting into the economy and not just being used to shore up individual companies’ investors?

Bostic: So that's a good question, and it's a difficult question, because there's a trade-off in all of these things about getting money out fast and getting money out carefully. And the more careful you are in setting up those criteria to start, the longer it's going to take to get that money in the hands of businesses and organizations that might need them to survive. So we've really tried to pick a middle ground. And so some of our facilities set up criteria that rely upon assessments of other organizations, like rating agencies. So if you take our corporate facilities, we're looking for an investment grade, basically AAA-type rated companies. And that has been the minimum threshold to participate. If you look at the SBA program, that's been structured to say, "Okay, there's certain size limits that are required," but also we're having business leaders attest that they need these funds to survive, to some extent. And I'm fully expecting there will be a set of audits that happen as weeks go along to verify, and businesses will be asked to prove it. And if they're not, they can be held particularly liable.

I think in all of these programs, there are things that are set up that provide some degree of review to make sure the businesses that should be getting these things are. I would say surely there're going to be those who try to get in inappropriately. It'll be really up to us to have systems in place to try to catch as many of them as possible. But you can rest assured that this is something that has been in our thinking and we've had conversations about every step of the way because these are, in a larger sense, taxpayer dollars and we must be good stewards of those funds.

Tyson: What opportunities do you see this pandemic creating in terms of structural economic changes moving forward?

Bostic: So this is a really interesting question. As we've gotten... I'll say for myself: as I've gotten used to working from home—you can see I'm sitting in my home office—it's gotten me to think about, well, what are the things I'm doing today that I'm getting done that I didn't think I could get done from my home office before? And it's been a large and growing set of things. These sort of... these webinars and these web meetings have been to some extent actually more productive for me in terms of getting right to the points. And it's really neat to see people because you can see their reactions in real time and keep them focused. So I think all businesses are going to think about that in terms of, well, what are the things that we need to do in an office versus what are the things that we could do more virtually taking advantage of technology?

I know for our [Federal Reserve] System, we've done a lot of upgrades in terms of our technological capacity to facilitate those sorts of things. Those investments are going to remain with us and so a question will be, to what extent do we use them? Another question is, how do we do restaurants, right? Do the same space? [Do we] now need to have more spacing between tables in order to accommodate some more distancing and more care? If that's the case, then cash flows per hour are going to be lower and so we may need to think about an extended business day for those sorts of things. I think all of these things are really going to come into play. It would be quite interesting to see how we can get responses to that. One of the things I'm asking my staff to do is, as we look further along into this, to ask those questions exactly. To figure out, are there some things that everyone is settling on that are becoming new norms for how we do business and how we live together? But I think this is going to create and really force us to face some experiments and figure out if they really work for us.

Tyson: We've got about five minutes left. I'm going to-

Bostic: I'll try to keep my answers short.

Tyson: OK, I'm going to try to get two more questions in. The Wall Street Journal recently had an editorial which stated that the Fed's goal is to save Wall Street by raising asset prices and hopes that the wealth effect trickles down to the rest of the economy. What is your response to this assertion?

Bostic: Yeah, I don't think that's really true. You know, I think that financial markets certainly are important or an important source of funds and capital for a lot of people. So we need to make sure they work. But our conversations with banks have all been focused on Main Street and not about trickling down but trying to say we need to create a structural environment at that level that can work for people. And then I mentioned the PPP, we're running a lot of liquidity into that and we're going to support that to whatever is appropriated by the Congress. And I mentioned the Lending Program as well, [which] is really focused on business and the many people who get their incomes and salaries from that. So I actually think that we are touching, across the board, Americans to try to help reduce their stress and strain.

The last thing I want to say—I know we're running short on time—is that we are also responsible for making sure that there's enough cash out there in the system, so all the cash you get at ATMs and at banking institutions, they started out as our facilities and demand for cash has gone up about 25 to 30 percent since this has started. Our teams are working overtime. So we are really touching and affecting people across the board at all parts of our economy, and I think that's one of our basic missions and we're committed to fulfilling it.

Tyson: What are your top three lessons learned so far from this unprecedented situation?

Bostic: Well, lesson one is that our organization has really been adaptable. We've adapted quickly, and technology can work in ways that I really hadn't imagined, and that's been quite gratifying. In terms of a second lesson, I think, is that communities can come together. I've been really gratified by how our teams, as they've gone out and engaged with businesses and communities and leaders, have gotten really clear communications, where we're really focused and tight on the same things, and it's really helping us be much more creative and expansive about the types of things that are possible. And that's been quite good.

And the third thing is that I'm really surprised. I learned that I can work a couple of feet from my kitchen and not be eating continuously. And that's been a good thing. So a little more self-discipline and restraint than I thought I might have. First two days were not so good. The last couple weeks have gotten a lot better, and so that's gratifying as well.

Tyson: All right. Well, thank you so much, Raphael. We did sort of run out of time, but thanks, everyone, for joining this important conversation. The slide that's up now is showing you how you can text to join and receive our weekly newsletter to keep informed. I think many of you are already subscribers, but if you're not, we hope that you will do that.

Thank you to everyone that joined us.

We will continue to host these webinars, and subsequent sessions will feature other Atlanta Fed experts highlighting additional actions the Fed has taken to support our communities in these uncertain times. All sessions are being recorded. The transcripts of the recording and the Q&A for all sessions will also be available on frbatlanta.org. Next Monday, April 20th, Mike Johnson, Atlanta Fed's executive vice president of Supervision, Regulation and Credit will explain the Federal Reserve's posture related to banking supervision and recent actions related to credit flows and liquidity for banks, and answer your questions. Please see our website, frbatlanta.org, to register. Thank you, and take care.