Rosengren sees slower recovery, need for monetary and fiscal stimulus

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A “fragile” economy and his expectations for a “more gradual” than forecast recovery mean “fiscal- and monetary-policy stimulus are essential,” Federal Reserve Bank of Boston President Eric Rosengren said Wednesday.

“While I expect the economy to recover in time, my own expectation is that it will be more gradual than the median forecast of FOMC participants,” Rosengren said in a speech hosted by the Boston Economic club, according to prepared text of remarks released by the Fed.

“Several challenges” on the horizon led to his more pessimistic view, including the possibility of a second wave of coronavirus infections, “which could cause some states to impose new restrictions on mobility and face-to-face interactions.”

Federal Reserve Bank of Boston President Eric Rosengren

Another round of infections, even if there are no shutdowns, will keep consumers and businesses from spending, he said.

Fiscal relief, which is needed but appears “increasingly unlikely to materialize anytime soon” remains a headwind. And if fiscal assistance comes after a second wave of illness, its “impact on the economy would probably not be realized until early next year,” Rosengren said.

“Financial spillovers from businesses impacted by the virus will become a more significant headwind going forward,” he predicted, and those losing jobs may find it tough to get new jobs, and furloughed workers could be permanently let go as businesses continue to struggle.

“I certainly hope that this less optimistic outlook turns out to be wrong,” Rosengren said. “But the likelihood that this view is right is why I believe additional fiscal stimulus, and continued monetary stimulus, remain necessary – despite some of the encouraging economic data received over the summer. In particular, as concerns monetary policy, it continues to be very important that the Federal Reserve’s emergency lending facilities provide support to the economy.”

If the coronavirus recurs, “during the fall, as I expect, it will exacerbate other economic and financial headwinds that I anticipate will be more apparent in the last four months of this year,” he added.

If consumers don’t travel or shop as much as in the past, “even conservatively underwritten properties will likely face challenges.” He pointed to collateralized mortgage-backed securities, where more than one in four are “delinquent” and nearly one in five “retail properties are in arrears,” which may underestimate the situation since CMBS would include larger properties. “Smaller hotels and retail strip malls, which are more likely to be financed by small and medium-sized banks, are likely to be even more severely impacted – although data on delinquencies from the summer are not yet available,” he said.

“I am especially worried about a ‘second shoe dropping’ that will particularly affect small and medium-sized banks, which provide a large share of commercial real estate loans and small business loans,” Rosengren added. “A curtailment of credit resulting from such problems has caused serious headwinds to recoveries in the past, and may be a serious problem going forward.”

Use of the Main Street Lending Program can support businesses that had been profitable prior to the pandemic and are expected to return to success after it, and be “a backstop.”

While economic numbers “have been encouraging” recently, Rosengren said, “the most difficult part of the recovery is still ahead of us. A full recovery probably requires the availability of vaccines and more effective treatments for the virus because until then, many businesses and households are unlikely to return to more normal spending habits. While I anticipate a slowly improving economy, economic activity still faces serious headwinds. Potential financial impediments and challenges in the labor market make the recovery process more gradual than any of us would prefer.”

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Monetary policy Eric Rosengren Federal Reserve Bank of Boston Federal Reserve FOMC