An Economic Update by Fed Chair Jerome H. Powell (mirrored)

AMERICA HEADS UP.
(sources below)

FED WARNS FOR CONTINUING ECONOMIC DAMAGE,

Fed warns of lasting economic damage
A long-lasting crisis due to the coronavirus can cause lasting damage to the economy. That is what Jerome Powell of the US central bank said in a speech this week. He fears that the disappearance of small and medium-sized enterprises in particular will affect the recovery capacity of the economy. These companies create a lot of jobs and are therefore crucial for the recovery.

Furthermore, Powell warned of a long period of stagnation, as companies will invest less if the economic outlook is bad. Companies will then hire fewer staff, which means the economy will need more time to recover. To date, low incomes have been particularly affected by the corona crisis, as they work in sectors most affected.

According to the president of the central bank, this crisis was different from others. Where previous crises were the result of structural imbalances or bubbles in the economy, he attributes this crisis entirely to the corona virus.

"The current crisis is unique in that it is due to the virus and the steps taken to mitigate its effects. This time, high inflation was no problem. There was no economically threatening bubble to burst and no unsustainable boom to crack. The virus is the cause, not the usual suspects - something worth keeping in mind when we respond. "

'MAY NEED MORE STIMULATION'
The Federal Reserve has taken several measures to stabilize financial markets since the onset of the crisis. The first step was to buy government bonds and mortgage loans, debt securities that are used as collateral within the financial system. She also injected billions into the repo market. Finally, the Fed came up with dollar swaps and an international repo facility to provide dollar liquidity to other central banks.

With this package of measures, the central bank tried to stabilize the international monetary and financial system. The central bank took even more measures to prevent companies and households from getting into trouble. Backed by a government guarantee, the Fed has started buying corporate bonds this week. Initially, this will be done via the secondary market, but the central bank also plans to lend money directly to businesses and American states.

MONETARY FINANCING
With the latter, the central bank is in fact doing monetary financing. She skips the market to quickly provide money to companies in need. According to Powell, the central bank only takes these measures in extreme conditions such as today. He promised to 'put these monetary instruments back' once the crisis is over.

Finally, Powell emphasized in his speech that the US central bank should only lend money and not spend it. The money that the Fed is now making available to the market should therefore be seen as an instrument for solving liquidity problems. The danger is that this crisis will last longer and that liquidity problems will turn into solvency problems. Therefore, the central banker calls on the government to consider additional tax incentives.

Scoures: https://www.goudstandaard.com/nieuws/fed-waarschuwt-voor-blijvende-economische-schade
https://www.federalreserve.gov/newsevents/speech/powell20200513a.htm
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