To paraphrase the old E.F. Hutton tagline (bonus points if you remember the commercials even dimly), “When the Federal Reserve talks, the markets listen.”
The Fed has been speaking loud and clear about preventing the financial system from seizing up as the coronavirus crisis threatens to topple us into a global recession. Its latest move: a program announced Tuesday to buy corporate IOUs — called commercial paper — to help ensure that companies have enough cash to operate and pay workers.
In rapid succession, the central bank has deployed many of the powerful tools it used during the last financial crisis to keep the cash flowing, including slashing interest rates to near zero and pledging to buy hundreds of billions of dollars in Treasury debt and mortgage-backed securities.
Has the Fed used up its ammunition in the early rounds of the coronavirus battle? No, according to Eric Rosengren, president of the Federal Reserve Bank of Boston.
“The hope is that we don’t have to do too much more, but if we need to do more, we will,” Rosengren said Tuesday in a telephone interview.
Rosengren — who took over at the Boston Fed in the summer of 2007, just as the mortgage crisis was careering out of control — said that among the additional steps the central bank could take is increasing the amount of Treasury and mortgage debt it buys from the initial target of $700 billion. It could also revive a tool, known as a term auction facility, that provides loans to banks so they can continue lending.
And while the Fed cannot buy corporate bonds without an act of Congress, it could fund a program that did so, much as it is doing with commercial paper.
Fed chairman Jerome Powell and his fellow policy makers have moved decisively to prevent a credit crunch — when bad times prompt banks to stop lending — and calm frayed nerves in the Treasury market. Their actions have mostly encouraged investors, who pushed the Standard & Poor’s 500 index up by 6 percent Tuesday on news of the commercial paper program and the Trump administration’s new-found support for using direct cash payments to Americans to blunt the pain of lost income and lost jobs caused by containment measures.
Still, as economist Kenneth Kuttner of Williams College noted in a recent EconoFact report, there isn’t much the Fed can do to provide financial help directly to businesses and consumers. That’s the job of the government. Congress and the White House have just begun negotiations on a financial aid package for households and businesses that could run $750 billion to $850 billion — or even more.
Rosengren said he’s most concerned about the blow we are about to take as consumer spending drops and layoffs climb. Big and targeted fiscal stimulus is needed quickly.
“I would focus the programs primarily on smaller businesses and lower-income individuals who are likely to be most impacted by shutdowns,” he said.
What does he think about the idea of sending checks to Americans to help them through the crisis?
“It’s important to get funds to people quickly,” he said. If checks are the quickest and most efficient solution, he’s all for it.
“But not everyone needs a check," he added. “It’s better to target those who do.”
The Fed is talking. I hope Congress and the White House are listening.
Larry Edelman is a Globe columnist. He can be reached at email@example.com.