Paula Tkac Talks about the Monetary Policy Response

On May 4, Paula Tkac, senior vice president and associate director of the Atlanta Fed's Research Division provided an update on the Federal Reserve's policy response to the pandemic in our Pandemic Response Series.


Princeton Williams: Good morning. Thank you for joining us today for the fourth episode of Federal Reserve Bank of Atlanta webinar series, examining our recent actions and continued response to the COVID-19 pandemic. My name is Princeton Williams and I'll be your moderator this morning. We're excited to have Paula Tkac, senior vice president and associate director of Research with us today. She will provide an update on a Federal Reserve's policy response to the pandemic.

Paula Tkac: Thanks Princeton. Welcome everybody. Good morning from Roswell, Georgia, outside the Perimeter. Thanks for joining us today. We thought it might be helpful to give you a bit of an update on the Federal Reserve's response to the ongoing COVID-19 crisis. So in order to do that, I want to provide a little bit of context, so join me for a second if you will, in a bit of a time machine.

Let's go back to January or February, just three or four short months ago, and remember what life was like. Economically speaking, for those of us involved in research and monetary policy, the economy looked really strong at that point, right? The unemployment rate was about 3.5 percent. Inflation was close to the [Federal Open Market] Committee's 2 percent target. GDP was growing in the fourth quarter of 2019 at just over 2 percent. Pretty much like that for the entirety of 2019, so we were in what we would consider a good place.

And then of course, with astonishing rapidity, COVID-19 landed in the U.S., and within several weeks, by the beginning certainly of April, but even many of us in March, we had moved as a society and an economy to a posture of shelter-in-place orders, stay-at-home orders, closures of nonessential businesses, and a massive public health response that was affecting each of us at a very individual level. But also, it was affecting the various infrastructure that our economy is built on.

So again, progressing through to today, where do we stand? Well, it's probably no surprise to any of you that the economy is in a very weak place because we have all taken on the responsibility of responding to the public health crisis by reducing our economic activity right? Like me at home, working remotely and all the rest of you, likewise, trying to moderate your activities.

So what do we have now? We have massive unemployment, right? We will get another labor market report, but right now, there are record breaking weekly numbers of folks filing for unemployment. Most of the estimates are something on the order of, let's say 20 million or more, have moved into unemployment in the past several weeks. Some of the sectors hit hardest are unsurprisingly, the sectors that are most related to being out and about. So brick-and-mortar retail, restaurants, hospitality, travel—a lot of the discretionary spending that all of us do in our daily lives and quite frankly most of the time don't think about.

Of course, those businesses rely on other businesses. So as those businesses contract, other businesses see their business and their revenue contracting—suppliers into restaurants, food suppliers, and others. But also there are other sectors that are even less predictably affected. So one of those is higher education, right? Most universities moved—again, very quickly like businesses—to a posture of stay at home. Students went back to their houses after spring break and classes are now online. Those institutions rely on tuition and room and board for their revenue, and so thinking about writing off the spring semester and moving into the fall, these are greatly difficult times for higher education.

Healthcare has also been affected. You might think that in the midst of a healthcare crisis, healthcare would be booming and in fact of course, we're marshaling huge resources to help those affected with COVID, but it also means pushing back elective surgeries and other preventative care and other sorts of demands on the healthcare system that right now, either folks don't feel like they want to do or are not aligned with the public health response.

We're now also seeing some reduction in durable purchases and sort of discretionary purchases, but also, some things that are a little bit bigger ticket, and nonprofits are seeing some stress. What's strong? Well, food, grocery, shipping, some tech, right? All the things that we rely on to keep doing most of what we can do while being separate physically from each other.

So it's important to note that this is not a typical economic slowdown, right? This was caused by an exogenous, outside, public health shock, the COVID-19 virus. So the response to it, is really going to be a public health response. So as we think about how the economy may evolve, and we think about the Fed's responses, we need to keep in mind that a lot of the traditional ways we've thought about, even handling something like the great financial crisis and the following great recession, are different than what we're facing right now. There's some things that are outside of the control of any of us that have to do with economic policymaking, whether within the Fed or the federal, local, and state governments. So this is a really important point to make.

So, what is needed or what can be helpful economically speaking when you're in a situation like this? Well, really the biggest thing is support, right? So many of you might've heard the word stimulus related to monetary policy. The idea in terms of providing economic support is not to stimulate activity, it's to support the activity that is really going on, and to try to provide a bridge for households and businesses as we move through this COVID-19 experience and we get to the other side.

So the economy started strong. We know there's a lot of foundational strength. How do we ride through this period in order to get to the other side? So one big component of that, of course, would be direct aid, and that would come through federal, state, and local governments. Congress passed the CARES Act and that provides a great deal of direct support to households and businesses; extended unemployment insurance benefits; Paycheck Protection Program of loans through the Small Business Administration; and some economic impact payments directly to households to help them weather through these difficult times when, again, their income and their revenue is being hit hard by the fact that we're all reducing our economic footprint, if you will.

So the question for us now is, what's the Fed's role? Right? How can the Fed help? The government is helping with some direct support. What can we do? Well, we can lend. So this slide, kind of gives you a bit of a schematic for thinking about how the Fed's response to the COVID-19 crisis compares to, let's say, a normal monetary policy posture for the Fed and the FOMC.

Slide: The Federal Reserve's Response - Funding, Credit, Liquidity and Loan Facilities - May 4, 2020

So if you look at the concentric circles here, the inner-most circle is what I've termed normal monetary policy. So this is where the FOMC, in a typical, normal time, let's say mid-2019, would have thought about calibrating its policy tool—the targeting of an overnight interest rate—to help achieve its dual mandate—maximum employment and price stability. That's kind of where you start, right?

The FOMC lowered that interest rate target down to the zero, lower balance, mid-March. So the FOMC is doing what it can to support economic activity, but that's not enough in some sense, right? It's a very broad-based tool. What is needed are some more targeted approaches to lending. So let's go back to kind of what is happening in the real economy. Businesses and households are seeing less revenue or income, those that have been hit particularly hard. So what's a natural way for them to weather that storm, bridge that gap, get over the tough spot?

Well, it's to borrow. It's to get some money in, to smooth out that profile of incoming revenue, pay it back later. That allows, not the biggest and most severe hit to be taken right now, but to kind of smooth out the impact of the crisis. So that's where the Federal Reserve lending responsibilities come into play. As you see the expanding circles here, you'll see that the Federal Reserve System has expanded its lending activity beyond depository institutions or banks that we would normally lend to through the discount window. If a bank was in good shape in terms of solvency but needs some liquidity, they could always bring us collateral. We've expanded beyond that zone and are now lending to other financial market participants, to primary dealers, and we're lending in support of direct, mainstream entities like municipalities, state and local government entities. Like issuers of commercial paper, regular businesses that issue very short-term debt instruments that allow them to manage their cash and credit.

Small businesses that are funded through the Paycheck Protection Program, I mentioned earlier, funded by Congress, opening up that liquidity flow so that lenders who went to those small businesses can free up more capacity, the Fed is lending into a facility that will purchase up those loans. So these are all the ways in which the Fed has in some sense expanded our ability to lend in times of distress, out beyond what would typically be a financial sector response, but indirectly into some very innovative facilities that will directly help support households and businesses as we weather this crisis.

So you might ask now, well OK, how long is this going to last, right? How long will these facilities be in place? What's going to come? The truth is, of course, that none of us has a crystal ball and no one really knows. Circling back to my beginning remarks. This is really a public health crisis that is having economic consequences and effects. So the public health response and the evolution of the virus—how we get control of it, whether we find a treatment, roll out testing programs, ultimately get a vaccine—will be important in influencing the trajectory of the economy, not only over the next few months, but realistically, over the next rest of the year and perhaps even into 2021.

So no one has answers for those things. What I can tell you is that, inside the Federal Reserve System, we're watching very closely, both the public health effects and the reopenings of some of the local economies, including here in Georgia, to see how the public health side of things plays out and to also understand better how people respond in the midst of what is a defining moment for each of us individually, as we think about our own public health and our organizations and our communities. So with that, I'll stop here and take some Q&A from Princeton.

Williams: Thanks Paula. That's very helpful. Before I ask the first question, I want to remind everyone that Paula will be answering questions that were submitted during the registration process. So we'll start with a question that asks, please explain the difference between the Main Street New Loan Program and the Main Street Expanded Loan Facility?

Tkac: OK. So there are now really, three Main Street lending facilities. I think it's the New Loan, the Priority, and the Expanded. The details of these are technical, and if you're a firm that's thinking about applying for a loan under these facilities, then the details are going to be very important. What's important to understand in the big picture sense is that this facility was meant to support lending to businesses that were larger than those under the Paycheck Protection Program, but not large enough or not with access to the capital markets, that could be supported under our primary and secondary or per credit facilities.

So there's a whole swath of American businesses that are in need of this credit. The three different components of the facility are meant to provide terms on which different kinds of firms can borrow. So a couple of the things that were announced last Thursday with the extended program are that the minimum size per loan has been reduced to $500,000. There are more businesses that are now eligible for these loan facilities.

One thing that was not addressed in that extension was the specific details of a facility or a program that would be helpful to some nonprofit organizations. Specifically, those that don't have a business model that would fit inside the Main Street lending facility. So as the public statement announced, there is still some discussion and looking as to how an approach for them might be helpful. I think the big lesson from all of that is that the details matter, right? So you can talk through what we just talked through and say, well, what businesses need is credit. How to extend credit in a prudent way, is bound up in details, in details of the kinds of firms that are out there in the economy and bound up in what the Federal Reserve can do.

So an important aspect of those facilities that I mentioned is that, they're all done with prior approval of the U.S. Treasury Secretary, and they're all done either without credit risk, meaning extending credit to high-quality businesses, or with some funding from the Treasury to help support lending to businesses that may be a little more leveraged. And this again was one of the things that came out in the Main Street Lending Program extension announced last week, was that firms that have more debt on their books, relative to their earnings, could be eligible, but there would be different kinds of terms on which that lending would go forward.

Williams: Very good. Well, moving from the response to the impact of the response. Our second question is, why didn't the QE from the last recession cause higher inflation? And, how do you think this new infusion of liquidity in the financial system will impact the inflation rate going forward?

Tkac: Wow. OK. So very briefly, again, for those of you that remember the details of the financial crisis and the Great Recession and I, too, was in the middle of it. I remember well, the discussions about the infusions of liquidity and the bond purchase programs and the injection of huge amounts of reserves, concerns about whether or not that would lead to high levels of inflation and high inflation rates. We didn't see that and understanding or unpacking that took a little bit of time.

But ultimately, I guess the best way to understand it is that the reserves that were put into the banking system stayed largely in the banking system. So a money multiplier that many of us would have learned about or taught to college students for a very long time would suggest that as you inject money in the banking system, it gets lent out, recirculated, lent out again—that's how money is created. Then sort of this, more dollars chasing the same amount of goods kind of idea, gets you to inflation.

On a broad-based level, nothing wrong with that idea, but again, the details matter. So in this case, the reserve stayed inside the banking system. Remember the financial crisis was one in which the banks were not all in the strongest shape, so they had to shore up their balance sheets. They worked with regulators to get themselves on a stronger footing. They increased their capital, they took a lot more proactive steps to ensure that they would have liquidity, if there were to be a period of financial distress. So that meant hanging on to a lot of reserves. Think of it as kind of a precautionary demand in the system. These are completely liquid cash-like instruments.

So when the money, ultimately, sat in the banking system and didn't circulate around, that's kind of the easiest way to think about why there wasn't an inflationary problem. I have learned, over time certainly, that you never say never. So we learned lessons from that situation, but you always have to be very judicious about how you apply them to this current situation, right? Again, this is unprecedented, this type of shock is unprecedented, the rapidity, the facilities that have been run out.

Thinking about the potential impact for inflation down the road is certainly something that we'll be looking at in the Research Department inside the Federal Reserve System. And looking at it in a very forward looking way to make sure that the Committee feels it has an understanding and the tools, as we support our principal, Raphael Bostic, who sits on the FOMC, to understand what the best thinking is about the possibility for an inflationary effect. That said, because you are looking for it, that's the best, in some sense, protection or behavior to make sure that you're managing it well, and that's what we intend to do.

Williams: Fantastic. So the next question says, how will the Federal Reserve monitor inflation and unemployment in the coming months, given that traditional measures don't provide an accurate picture of the economy during the pandemic?

Tkac: Yeah, so even in normal times, I think, a lot of you may know that the macro statistics come out with much delay and again, are very broad, they're about the macro economy. One of the things we've been very interested in in Atlanta is digging below the surface into some of the differences, geographically, across sectors, and the new ways that people are working to understand some of these macro variables like an unemployment rate or an inflation rate.

So for quite a long time, we've been looking at a kind of a multipronged labor market set of indicators. We typically have them as a spider chart on our website because we realize the unemployment rate is not fully sufficient. Now, even our dashboard is probably not sufficient. So we, like many others in the economy, have been voraciously consuming alternative sources of data to understand the mobility of people during the COVID shelter-in-place orders, how businesses are reopening.

We have a massive outreach program in Atlanta that talks to businesses, nonprofits, and community organizations to understand what's going on in the Sixth District, but also nationwide, in important sectors like trade and transportation and energy. So we're going to be bringing in a lot of that, call it anecdotal information to blend with data, both traditional and new, to come up with our best understanding. Not only of what's going on, but what more questions do we want to ask? That's really kind of the process. So think of it as a scientific method. You gather information, you ask more questions, you gather more information, and in some sense, a picture starts to develop and then of course evolve. That's the challenge for policymakers during this time.

Williams: Very good. Another question is, what do you see as the likely path and timeline regarding the economic strength of the U.S. economy, especially considering the current weakness that we're seeing on both the supply side, with supply chain disruptions and demand, at the corporate consumer levels? Sometimes people have asked, do you anticipate a U- or a V- or a W-shaped recovery?

Tkac: Yeah. So again, I'm going to cycle back and kind of repeat this notion of it's a public health crisis with economic repercussions, right? So both of those pieces are going to be important in understanding how the economy evolves. So for those who haven't heard these letters before, a V-shaped recovery economically would mean a pretty rapid decline, which of course we've seen, but then a very rapid pickup, right? So you can imagine that coming, if we had an instantaneous vaccine that everyone was confident of and was widely available, right? So something that could allow your lives to return to normal, super quickly and everybody was comfortable doing that.

A U-shaped recovery is one in which it goes down relatively quickly, what we've seen, and then activity stays low for a while and then begins to pick up. Now the other side of that U can be steep or shallow, but the idea is you got to spend a little bit of time sorting things out, and then the economy really begins to recover as we approach something, albeit, a new normal, form of activity.

A W is, you respond and then there's another steep slowdown. The W in my mind is probably most related to the public health aspects of the crisis. So you may have heard about a potential second wave.     In the 1918 flu pandemic, there was a second wave of infections. So if, there were to be the resurgence of COVID and requires shelter-in place-orders again, you could see some sort of wavy pattern of economic activity. Right now, it's too soon to tell across these things because one, we don't fully understand, have our arms around, or really have much of the public health response under way. Huge amounts of research going on, testing going on, awesome healthcare to the folks who've been infected. But we don't know how the different aspects of treating, testing and caring for folks in terms of the vaccine, is going to play out and over what timeline. But we also don't know how people are going to feel, right? We are largely a consumer-based economy.

So a big question about the economic recovery is, how do folks feel about being out again? How do businesses feel about the uncertainty, in part about potentially over a second wave or what lessons that they learned from this particular episode? What kinds of investments or different plans would they like to have in case something happens again? We need to fold in all of that uncertainty again, mostly by talking to folks to understand what the response of all the drivers of our economy are.

The drivers are you and I and all of our individual and collective organizations. So the psychological aspect is there, the economic aspect literally is there, in terms of needing to make payroll and pay your mortgage and those things. And then there's that really biological public health part. So again, no crystal ball, but we're certainly watching and trying to be prepared for a variety of possible trajectories so that we understand again, what the best thinking is in terms of any future response or things the Federal Reserve could do to be supportive.

Williams: Great. We've got about five minutes left, so I wanted to close with a question that gives you free rein. So what are your top three lessons learned so far from this unprecedented situation?

Tkac: Wow. OK. All right. So personally, apparently my household needs a strategic stockpile of paper products and pasta. Right? I did not know this was a thing that I needed, but clearly I need that. I'm watching myself on video all day. I clearly need a haircut and I have all kinds of facial expressions that I never really knew that I had. I'm a lot more self-aware these days.

Professionally, I think we've learned a lot or it's reminded us of a lot of things that we knew but had kind of not really paid attention to in a while. So I'm reminded of a few quotes. One, no battle plan survives first contact with the enemy. So in a policymaking sense, you know the direction is an extension of credit, but then, how do you do that? What are the details, where you want to get economic impact payments out to the country? How do you do that effectively? How do you get loans to small businesses that are not used to ... There's no agency that's touching all of them. What do they need and how can you do that in a really quick way? Is the technology set up?

So, I think we, collectively, me personally, but everyone involved in this, has learned a ton about the details that we don't typically see and we understand them better now, and so that will make us stronger and better going forward, but it takes time and that can be frustrating. So I've learned patience, too. I guess as an economist, the rapidity with which this has hit, I think, has shown the invisible hand when it becomes wounded, let's say. So every day we talk about allocating resources through the economy in the best possible ways through our markets and private business interactions and folks working their various jobs and starting up firms, and it is invisible.

Then when it gets impaired, you begin to see what it's really doing because you're now trying to design support and you're looking for support that typically would've come to you in a system that you understood and worked with it. Now with that very quickly being impaired, we're really seeing some of the ways in which our economy is connected through supply chains and through, again, where consumers are geographically doing things differently than in other places. So the lesson from that is to be nimble, right? The lesson from that is to learn the details of that invisible hand and to try to be nimble as you react.

Then I guess, my last lesson combines kind of the personal and the professional. And that is again, unprecedented situation where folks are under economic stress, under health stress, under psychological stress. People working at home trying to home-school their kids, people worried about their families or the first responder or the first line helping us, first reason, doing all the important things that all those of us, stay in our homes to try to help with the public health side.

The community and connection are probably the biggest sources of support that we can each provide to our families and each other, to our friends and loved ones that we can't see in real life, but we can see virtually; to our communities, ways that we can volunteer and help those of us that don't have as much or are under more stress than we ourselves are in individually. And connection with our coworkers, connection across all the agencies that don't typically work together, across countries, we've certainly seen that. So that to me, is probably the biggest theme that I've taken out of that and try to live it in all parts of my life.

Williams: That's fantastic. Thank you so much for opening up and for sharing really good economic lessons for us as well. This is all the time we have today, and I'd like to thank Paula and all of you for participating today. We will continue to host these webinars and highlight additional actions that the Fed is taking to support communities during these very uncertain times. If you know of someone that would find these sessions valuable, an audio file and a transcript will be archived on our website at I'd like to draw your attention to the Text to Join sign. If you aren't already a subscriber, I encourage you to subscribe to our weekly digest newsletter for the most up-to-date information. Text F-R-B-A to 33777.

And finally, be sure to join us for our next event this Thursday, May 7, at 11 a.m. Eastern. We will have Sarah Stein, an adviser on our Community and Economic Development, and Domonic Purviance, a senior financial specialist in our Supervision, Regulation and Credit Division, as our guest speakers. They will each explain current housing policies related to mortgage relief, forbearance, and rental affordability. They will also talk about the eviction moratoriums and answer some of your questions. With that, I'll officially bring this session to a close. Thank you for joining us. Take care, and most of all, stay safe. Bye-bye.

Tkac: Bye.