We’ve been told that confidence is everything. And with consumer spending amounting to 70 percent of domestic economic activity, lagging confidence ripples to negative effect. Perhaps this explains why, on March 26, as millions filed for unemployment, and as a handful of Senators debated how much relief jobless Americans needed (or deserved), Federal Reserve Chair Jerome Powell did the unexpected. He went mainstream.
Powell appeared on NBC’s “The Today Show,” in order to buoy Americans with the assurance that what they were experiencing wasn’t a normal recession. “The economy performed very well right through February,” Powell explained. “This isn’t something that’s wrong with the economy. This is a situation where people are being asked to step back from economic activity, close their businesses, stay home from work. So in principle, if we get the virus spread under control fairly quickly, then economic activity can resume and we want to make that rebound as vigorous as possible.”
In his 10-minute interview, Powell explained that, with the fed funds rate already at zero, it was the Fed’s emergency lending operations that would become the bridge to economic salvation, and that lending was limited only by the Fed’s ability to take on losses.
Powell’s interview came four days after Minneapolis Fed President Neel Kashkari, appearing on CBS’s “60 Minutes,” said if the shutdown lasts the entire year, the impact would be “very damaging to the U.S. economy.” Consequently, the Fed is flooding the markets with liquidity and looking back on its own admitted mistakes from 2008, when Kashkari characterized the Fed’s response as “too timid.”
With this crisis, the Fed is building upon the $2.2 trillion emergency aid package authorized by Congress and the President March 27 by funneling $4 trillion to businesses through its Main Street Business Lending Program. The Fed intends to use banks as a conduit to funnel short-term financing to small- and medium-sized firms so that they have access to capital. (The MSBLP complements the SBA’s Paycheck Protection Program, which began lending April 3.)
Details on how the MSBLP would help the country’s 6 million small businesses (those with fewer than 500 employees) and 18,000 medium-sized businesses (with between 500 and 5,000 employees) were still being worked out as this issue went to press. Even without specifics, Joe Brusuelas, chief economist with RSM, called the move a “significant intervention into the real economy.”
Banks across the country are generally on sound footing in terms of their capital positions. With liquidity from the Fed flowing into banks, lending activity will accelerate. That doesn’t guarantee easy days ahead.
“Community banks need to be prepared for more challenging news over the next few months, and potentially beyond,” said Steve Kitts, EVP and executive director of investment banking for Kansas City-based UMB. Caution is necessary, he said, because the full, true economic effects of the pandemic have not yet been felt. “Community bankers may be addressing concerns not only over the next few months, but up to a year or more.”
Businesses will struggle and market volatility will continue. Kitts advises: “In the short term (60 to 90 days), community banks need to be cautious, continue to evaluate the economy. … Stay in touch with borrowers to understand how the economic slowdown is impacting their businesses.”
As far as managing net interest margin in the current low-rate environment, Kitts advised bankers to consider these moves:
“Many banks are likely to experience a build-up of cash,” Kitts said. “This will be a challenge in this low interest rate environment.”