Fed Officials Warn of Risk of Widespread Business Failures (1)

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, Federal Reserve Bank of St. Louis President James Bullard said in a video speech from that city Tuesday.

Watch: Federal Reserve Bank of St. Louis President James Bullard says a prolonged economic lockdown risks triggering bankruptcies and a Depression-scale recession.

(Source: Bloomberg)

Cleveland Fed President Loretta Mester, speaking later on Tuesday, noted similar concerns after outlining a baseline outlook that included unemployment reaching or exceeding 20%.

Pessimistic Scenario

“It isn’t difficult to imagine more pessimistic scenario,” she said during an online event organized by the CFA Society Chicago.

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.

James Bullard

Photographer: Luke MacGregor/Bloomberg

The decline will be “a staggering figure and way beyond anything experienced in the post-war era in the U.S.,” Bullard said to the Official Monetary and Financial Institutions Forum. “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” without businesses resuming, he said. With a more focused approach, the U.S. could get a solid rebound that would be mathematically a record starting in the third quarter, he said.

Neel Kashkari

Photographer: Andrew Harrer/Bloomberg

Kashkari, in a virtual event, 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. “We might just have this uneven crawling back up to more of a normal economy.”

All three presidents said negative interest rates are unlikely to be a tool the Fed would rely on anytime soon, with Bullard citing the experience of their use in Europe and Japan. Asset purchases are a more likely tool, Bullard said.

Speaking on CNN International, Kaplan said that if the U.S. reaches the Fed’s expected peak unemployment rate of about 20% and if the figure is about 10% by year-end, “there may well need to be more fiscal stimulus in order to boost economic growth.”

(Updates with comments from Mester in third paragraph.)

--With assistance from Christopher Condon.

To contact the reporters on this story:
Steve Matthews in Atlanta at smatthews@bloomberg.net;
Matthew Boesler in New York at mboesler1@bloomberg.net;
Catarina Saraiva in Houston at asaraiva5@bloomberg.net

To contact the editors responsible for this story:
Alister Bull at abull7@bloomberg.net

Ana Monteiro, Vince Golle

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