The Federal Reserve Bank”™s role in a post-pandemic economy was the subject of recent presentations made by the chief executives of two regional Fed institutions.
John C. Williams, president and CEO of the Federal Reserve of New York, offered his outlook during an Oct. 7 speech during the Hoover Institution”™s “The Road Ahead for Central Banks” virtual series. For Williams, the role of the Fed during the economic tumult of the pandemic is part of its historic mission.
“While our monetary policy approach has shifted, our fundamental goals have not,” he said. “The Fed has two goals set by Congress: maximum employment and price stability. These ”˜dual mandate”™ goals remain on an equal footing, and our commitment to delivering on both has not changed. In addition, our assessment that a 2% long-run inflation rate is most consistent with achieving both of our dual mandate goals is unaltered.”
What has evolved, he noted, was how the Fed can achieve these goals. He pointed to the Fed”™s response in the aftermath of the Great Recession as a reference point in dealing with economic chaos and as the foundation for its ongoing approach, which he added was generating early positive results.
“The good news is that the economy has started to recover and the unemployment rate has come down,” he said. “About half of the jobs lost during March and April have been regained.”
But Williams warned that problems persist: an unemployment rate of nearly 8% and disproportionately high unemployment among African Americans and Hispanics, along with a severe loss in the number of black-owned businesses compared to white-owned enterprises.
“In terms of monetary policy, the appropriate focus right now is on getting the country back to work,” he continued. “For that reason, policy is supporting very low interest rates to provide stimulus to the economic recovery and keeping inflation expectations anchored at 2%.”
Williams cited an August announcement by the Federal Open Market Committee, the central bank”™s policymaking arm, that stated the Fed “will review our longer-run framework roughly every five years,” which he defined as the central bank”™s commitment to transparency and a willingness to adapt to changing circumstances.
“Reviewing our longer-run framework and approach to our goals more frequently will ensure we are well prepared for the future, whatever it may bring,” he said.
Separately, Eric S. Rosengren, president and CEO of the Federal Reserve Bank of Boston, used his Oct. 8 Marburg Memorial Lecture before the Marquette University Economics Department to detail economic potholes that were laid bare since the pandemic took root in the U.S. in March.
“In terms of this vulnerability to disruptions, it is possible that no one could have predicted that a worldwide pandemic would occur precisely in 2020,” Rosengren said. “But one could have anticipated that having highly levered firms and excessive concentrations of commercial real estate lending at some institutions would make the economy more vulnerable to a variety of disruptions, including a pandemic or other shock.”
Rosengren defended the Fed”™s current policy of keeping rates at historic lows in order to stimulate a weakened economy, but he warned that strategy will create more problems than solutions when the economy regains its vibrancy, with the threat of “excessive risk-taking as businesses and firms take on additional debt and accumulate more risky assets in search of better returns ”“ potentially bidding up asset prices to unsustainable levels. The financial pressures associated with such behavior build gradually, and only become clear in the next economic downturn.”
Rosengren theorized that the “slow build-up of risk in the low-interest-rate environment that preceded the current recession” could likely contribute to a more difficult economic recovery.
“The increased risk build-up, such as the reaching-for-yield behavior in commercial real
estate or increased corporate leverage, make economic downturns including this one more severe,” he said. “These are issues that I and others spoke about quite extensively in the years before the pandemic hit, in particular with respect to questions about the need for accommodative interest rates when the economy was doing well, and the potential for a build-up of financial stability risks.”
Rosengren acknowledged there were no federal regulatory and supervisory tools to moderate risk build-ups. He also called for increased precautions against financial stability risks to buffer the next economic catastrophe if the nation remains in a low interest rate environment for an extended period of time.
“An important area of research, going forward, is to understand how the changes in risk-taking behavior have made the economy more susceptible to severe and protracted downturns that resist recovery,” he said. “The urgency of these topics is underlined by the fact that the economic impact of these downturns is disproportionately borne by those who can least afford it.”
