WASHINGTON (Reuters) – The Federal Reserve is “aggressively” addressing problems in financial markets as it sees them arise, but may not be suited to tackle some of the deeper challenges such as funding for small businesses that the coronavirus epidemic is posing, Richmond Federal Reserve president Thomas Barkin said in an interview on Thursday.
Despite broad expectations for what the central bank can do, Barkin said “the key thing is how long does it last and are we ready to return? That depends on the availability of tests at scale – and it depends on us having protocols so restaurants can tell patrons it is safe to eat and airlines can tell passengers it is safe to fly…and make this a couple month check mark” in the economy instead of a deeper problem.
The Fed’s focus at this point “is getting markets to be liquid,” so that financial firms continue transacting business, Barkin said in reference to the emergency steps the Fed has taken to keep the commercial paper, Treasury and foreign dollar funding markets functional.
The Term Auction Facility of short-term loans for banks that was used in the 2007 to 2009 crisis for example, Barkin said, was “on the table” if needed but had not been deployed so far because banks have not faced funding constraints.
Likewise, he said some of the Fed actions expected or advocated by market analysts and forecasters, such as yield curve control or a boundary stretching program to fund small businesses, may not yet be appropriate or best handled by the central bank.
“What you see is the Fed aggressively trying to open markets that are closed for the wrong reasons,” Barkin said, adding that he felt progress has been made but “we are not all the way there.”
His comments follows moves by the Fed this week to resurrect much of its playbook from the 2007 to 2009 crisis. Some steps have seemed to hit the spot — foreign central banks quickly tapped Fed dollar “swaps” announced on Thursday morning — while other problems such as stress in the commercial paper market, important for larger companies to manage cash flow, have proved tougher to resolve.
Expectations are rising for the Fed to do more, but Barkin noted some of the issues may not be suited to central bank intervention.
For example a chief problem facing restaurants or small businesses in coming weeks may be the inability to make rent or lease payments, an issue he said was more directly worked out with landlords unlikely to fill vacant space in this environment.
Reporting by Howard Schneider; Editing by Chizu Nomiyama