NY Fed's Williams: May Take Years for US Economy to Fully Recover

The Federal Reserve launched an unprecedented response to smooth out market disruptions caused by the coronavirus outbreak, but the full scale of the virus' toll on the economy is still unknown and it may take a few years before the U.S. economy fully recovers, New York Federal Reserve Bank President John Williams said Thursday.

The Fed joined central banks around the world in efforts to bolster the global economy as the spread of the virus led to widespread closures of restaurants, museums and other businesses.

Investors have fled to safer assets, creating market volatility and spurring the Fed into action to keep cash flowing through key credit markets, Williams said in his first public remarks since the central bank slashed rates to zero in mid-March and launched open-ended purchases of Treasury securities, mortgage-backed securities and other assets.

"The coronavirus pandemic has created circumstances we have never experienced before in our lifetimes," Williams said in a webinar organized by the Economic Club of New York. "The reality is that the full scale of the economic consequences is still unknown."

Fed officials moved rapidly to stem the economic damage caused by the coronavirus pandemic by cutting rates and launching a series of emergency lending tools meant to support money markets, corporate bonds, mortgage bonds and other markets. The New York Fed is tasked with executing most of those facilities.

"To put the current situation in context, we are running more open market operations, for greater sums, than at any time in our history," Williams said.

Lorie Logan, the manager of the System Open Market Account, said earlier this week that the Fed's actions helped to ease trading conditions in some markets. However, she said it may be a while before markets return to pre-crisis levels.

Williams also said Thursday that the uncertainty is not over. Once the spread of the virus is contained, it may take a while for consumers to feel safe attending concerts or other large events, Williams said during a moderated discussion.

"First we have to make sure we're seeing the number of cases plateau and come down, and then think about a gradual return to normal," Williams said, adding later that it may take one to two years to get the U.S. economy back to "full strength." 

Among other Fed officials speaking Thursday, Atlanta Federal Reserve bank President Raphael Bostic said U.S. small businesses may need as much as $500 billion a month to fully ensure their survival through the widespread closures and disruptions slamming their revenue during the coronavirus crisis.

That "baseline" figure derived from staff analysis, he said, would be a starting point for discussions about how to expand a $350 billion small business lending program that was exhausted in about two weeks.

"Using that as a benchmark might give us some guidance. ... It would not be good to lose them," Bostic said of the country's millions of businesses with fewer than 500 employees.

The Paycheck Protection Program for small business was one of the signature elements of the $2.2 trillion emergency package approved by Congress late last month to try to keep the economy intact until the coronavirus outbreak is controlled and stores and businesses can safely reopen. Small businesses are allowed to take out four-year loans, and any amounts used to pay workers or basic bills like rent are forgiven - in effect turning the loans into government grants.

The money has quickly run out. Some 1.6 million companies have had loans approved, but millions more may need or want them.

"It is my sense that there are lots of businesses that may have needed this support and did not get it and we need to make sure they get whatever support," is needed to survive the crisis, he said, adding he expected Congress to move quickly to expand the program.

The Fed itself is backing the program by allowing banks to turn the loans over to the central bank, in effect allowing them to collect a processing fee and then quickly make room for other transactions. The Fed said today that "facility" is now open for business.

Meanwhile, Dallas Federal Reserve Bank President Robert Kaplan said he is "open minded about what else we need to do" to help the U.S. economy amid the coronavirus pandemic, including potentially coming to the aid of non-profits and mortgage servicers. 

But, he suggested in an interview with Bloomberg Television, he also wants to protect against moral hazard - bailing out those who got themselves in trouble by taking too many risks. "I am concerned about, from the Fed's point of view at least, intervening in businesses where they were leveraged going into this," he said, adding that any such bailouts should be up to fiscal authorities.