Fed Pushes Aggressive Action; Beige Book Shows Slowdown

Vito J. Racanelli

As has been the case for months now, Federal Reserve officials continue to spend time in speeches justifying what it has done and putting off criticism, particularly of the idea of a moral hazard. The latter is a very real possibility, I think. Moreover, while many pundits believe the Fed did what it had to do, it’s important for investors to recognize that not everyone agrees with that. Frankly, given there is no control group, it will never be possible to confirm the Fed “saved” economy or not with certainty.

The Fed is hard at work pushing the efficacy of how its aggressive actions are in the country’s interest. The Fed’s original legal mandate is working for the maximum employment that is consistent with stable prices. Now that the Fed is the world’s central bank, it has taken upon itself the authority to heap on many more responsibilities.

Here’s what the Fed’s been saying. On Bloomberg TV, Fed Vice Chairman Richard Clarida said of the Fed’s huge lending programs: “It’s an ambitious and entirely appropriate and aggressive and forceful use of monetary policy in these times.” Meanwhile, Fed Reserve Bank of Chicago President Charles Evans said, “…the past month demonstrates that the Federal Reserve will use its tools aggressively to keep markets working so that credit can flow to households, businesses, and state and local governments throughout our economy.”

See a pattern here?

Clarida dismissed a question about whether the central bank had created a “moral hazard” that encouraged risky investor behavior when the Fed moved quickly to backstop swaths of credit markets. He said the Fed’s action is fully appropriate and doesn’t see the interventions as creating risk-taking problems once the coronavirus crisis has passed. Evans said, “I don’t really worry about that [moral hazard] in the current situation,” in a video appearance for an event held by the Carnegie Mellon University Tepper School of Business.

See patterns here? I do. If the Fed is always going to come to the rescue, then behaviors that would be helpful long term—saving for a rainy day, taking on less risk and debt—would be costly and foolish for a company to undertake if its competitors don’t. The Fed will always be there to make sure you don’t learn from your mistakes. Everyone gets an A for effort.

Evans also said, “There’s just no way you could have insured against this.” Now, he said, is a time for the government to “socialize more of these losses.” It’s easy to say this time is different but it isn’t. Any surprise can be called an unexpected exogenous hit.

Separately, the Fed released its “beige book” about the U.S. economy, which confirmed that the coronavirus spread has hit the U.S. economy hard and fast. The economy has entered a deep downturn that will likely be a recession. How bad is hard to tell at this point. The beige book is a regular report of anecdotes from businesses around the nation.

The yield on the benchmark 10-year U.S. Treasury note was 0.65% vs 0.72% one week previous.

More from the author

Vito J. Racanelli
Share
Disclosures (show)
FS Insight

Sign in to read the report!

We have detected you are an active member!

Ray: f5f1fa-516a4b-ca73de-1b9a8a-fb0244

Don't Miss Out
First Month Free

Tickers

Trending tickers in our research