The coronavirus’ hit to revenues risks a wave of bankruptcies and threatens the Federal Reserve’s relief efforts, James Bullard, president of the Federal government Reserve Lender of St. Louis, told the Financial Times.
The United States is slowly climbing out of its worst recession in almost a century; however, soaring COVID-19 case counts in Texas, Florida, California, and other states have revived fears of another major outbreak. The U.S. is “still in the center of the crisis right here,” Bullard said, and virus-fueled insolvencies could lengthen the already severe economic downturn.
“Even though we got past the initial wave of the March-April timeframe, the disease is still quite capable of surprising us,” Bullard told the reporter Wednesday. “Without more granular risk management on the part of the health policy, we could get a wave of substantial bankruptcies and [that] could feed into a financial crisis.”
The Federal Reserve has faced pushback because of its continued usage of corporate debt purchases recently. Fed Chairman Jerome Powell described the policies as essential to maintaining healthy marketplace functioning and steer clear of a financial-sector meltdown. Yet Home legislators have questioned their requirement and if they encourage outsized risk-acquiring among speculative investors.
Bullard concurred that the unprecedented liquidity applications are “controversial” but echoed Powell in helping their continued use. “With all these applications, the idea is to ensure the marketplaces don’t freeze up entirely, mainly because that’s what gets you right into a financial crisis when investors won’t trade the asset at any cost,” Bullard said. “It isn’t my base case, but we could take a convert for the worse at some time in the future.”
The St. Louis Fed chief doesn’t expect the current economic slump in its present state to be as problematic for policymakers as the financial meltdown. Officials have repeatedly claimed that the downturn is an unprecedented health crisis rather than an indicator of private-sector malfeasance. A far more coordinated policy response over the world’s central banking institutions also helped cushion the overall global economy against a sharper plunge, Bullard added.
“Here, for all your difficulty and individual tragedy around the pandemic, that is a well-comprehended shock,” he said. “There has been more unity in the Fed about what the policy response should be, and even globally, that’s been true.”