The Federal Reserve is preparing for the possibility of an economically debilitating second wave of coronavirus infections even as it’s hoping that can be avoided.
In launching the Main Street and corporate lending facilities this month and starting to buy corporate bonds, the central bank has laid the groundwork for stepped-up support for the economy and financial markets should they be undermined by fresh outbreaks of the virus.
“They want to be ready in case things get worse,” said
Lawmakers are likely to question Fed Chairman
In testimony prepared for delivery to the committee, Powell stressed the importance of containing the contagion as the economy recovers from its deepest contraction in decades.
“While this bounceback in economic activity is welcome, it also presents new challenges -- notably, the need to keep the virus in check,” he said.
Among America’s most-populous states, Texas, Florida and California are experiencing climbing coronavirus cases even while others, including New York, see declines. Overall, counties accounting for between one-third and half of U.S. gross domestic product are suffering from worsening trends in new cases or Covid-19-related deaths, according to research by Deutsche Bank AG economists.
U.S. stocks rebounded on Monday after dropping to a two-week low on June 26 as increasing virus infections began stopping progress on reopening the American economy, with Texas and Florida halting drinking at bars.
Federal Reserve Bank of Kansas City President
Powell has said that policy makers assumed there wouldn’t be a “substantial second wave” of infections when they penciled in their forecasts for the economy at their last meeting on June 9-10. But he and other officials have made clear they’re primed to do more if a widespread outbreak threatens the economy.
Finance First Responders
In the event of a severe second wave,
That seems to be how Fed officials are thinking.
In explaining why the central bank started buying corporate bonds this month even though the market for such debt has improved substantially, Powell said the Fed wanted to follow through on its commitment to do so and also show it would be able to act forcefully if the economy worsened.
“We just want to be there if things turn bad in the economy,” he
The Fed has invested about
So too is the Primary Market Corporate Credit Facility, which the Fed opened for business Monday. The program, which is the last of the Fed’s emergency facilities to become operational, is designed to buy bonds directly from companies upon issuance.
The Fed has so far not made any loans under its Main Street Lending Program, aimed at helping smaller firms. Boston Fed President
“It actually has the potential to be a significant help to a lot of borrowers, both businesses and non-profit borrowers, particularly if the fall ends up being more troublesome than we’re hoping,” he told Bloomberg News in a June 19
In his prepared testimony, Powell said the program will begin extending credit “soon.”
Wrightson ICAP LLC chief economist
Former Fed Chairman
The lack of lending by the Main Street Program is another matter. “That is a concern, both politically and also in terms of getting liquidity to the firms that need it,” Bernanke said.
Lawmakers might press Powell on Tuesday to explain why the Main Street loan facility has been slow to gear up.
They also might call on him and Mnuchin to help borrowers in the commercial mortgage-backed securities market. More than 100 lawmakers wrote to the two policy makers last week warning of a crisis in the market if something wasn’t done.
“If the rise in virus cases creates a bout of financial instability and markets react negatively, the Fed has the tools already at hand to address those challenges,” Meyer said.
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