By Robert Wenzel
The New York Federal Reserve Bank President John Williams spoke in New York City on Thursday before the Foreign Policy Association at their annual Financial Services Dinner, where he was presented with the FPA Medal .
The speech at the St. Regis Hotel was scheduled long before the outbreak of the Wuhan coronavirus (COVID-19) but he spent most of his speech discussing the virus and what the Fed’s response to it would be.
Here are key snippets from the speech:
The outlook is evolving and highly uncertain. In the weeks and months ahead, we will continue to closely monitor developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.
I’ll conclude with this: The coronavirus poses evolving risks to the U.S. economy. Our policy action this week positions us well to support the economic expansion. We are carefully monitoring the effects of the coronavirus on the U.S. economic outlook and will respond as appropriate. Our focus remains trained on serving the American people by pursuing our dual goals of maximum employment and price stability.
Of course, there is little the Fed can do at this time that will really have an impact unless they want to gather the Plunge Protection Team together and run up the stock market.
This they could do but there is no indication they are planning to do this at this time. (Side note: Interesting time for Jamie Dimon to have emergency heart surgery. Too much pressure?)
By cutting interest rates, as the Fed is doing, the central bank pumping additional money into the economy. It is going to flow somewhere. My guess is that a lot will flow into the housing market. Mortgage rates could drop even below 3% and that is going to make housing look very attractive to many–even if house shoppers have to wear masks when shopping for a house.
Williams put his finger on the weakest part of the economy because of the virus:
[W]e’re seeing concerns around the tourism and travel sectors, in particular.
When the panic is over, I suspect air travel will pick up first—but the cruise ship industry is going to be hurting for a very long time.
What Williams didn’t publicly talk about is the planning that is going on in the deepest bowels of the Fed and Treasury in joint planning sessions.
The top officials in these sessions are working out all possibilities they can thin of, including a worst-case scenario where the President locks down a large region, or all of the US. The scenario is considered extremely remote. However, if such a lockdown occurs for an extended period of more than two or three weeks, then many firms, and individuals who live paycheck to paycheck, are going to be in serious financial trouble.
Under such a situation, the thinking is the President might have to declare a temporary moratorium on all debt and rental payments in the locked-down region. This is where the Fed would come in and shore up banks who aren’t receiving scheduled debt payments.
I want to emphasize this is worst-case scenario “war game” planning that is not expected to be implemented but it is being thought out.
The most likely scenario is that the virus is not much more severe than the common flu, and on top of this, it has a good chance of dying out as the weather gets warmer, just like the flu tends to do.
However all this plays out, I am warning in the EPJ Daily Alert that the Fed’s additional money pumping means accelerated price inflation on the other side of the panic.