Clarida Weighs in; Main Street Loans Still Stuck in Neutral

Vito J. Racanelli

Believe it or not, Fed Chair Jerome Powell is not the only person at the Fed who can make headlines. This week, Vice Chair Richard Clarida had some interesting things to say.

Clarida thinks it could take “another year or maybe more”, for GDP in the United States to recover to its previous 2019 peak. And given the dismal outlook that many members of the FOMC have had, my natural reaction is: Just one year? Not bad, we’ll take it.

But just like every positive statement that comes out of the Fed these days, it was met with many qualifiers. And if I had to pick the most important one, it has to be Clarida’s outlook for the labor market.

He thinks it will take even longer for the unemployment rate to return to a level consistent with the Fed’s maximum employment mandate. In particular, he highlighted that even over six months since the pandemic’s onset, the unemployment rate is still at 7.9 percent as of September and would be about 3 percentage points higher if labor force participation remained at February 2020 levels. Yikes.

Clarida also noted that “additional support from monetary-and likely fiscal-policy” will be needed. Economist Tim Duy sees this as a hint that the Fed is gearing up for something new in the coming months. I think he is well reasoned and would not be surprised if the words “balance sheet” begin working their way back into the financial media.

Regarding the Fed’s struggling Main Street Lending Program, Congressional Oversight Committee member Bharat Ramamurti had some interesting insights this week. His view on the state of the program is pretty simple: “so far it has failed”.

And while this failure of this program has been swept under the rug in the midst of the election and the virus, Ramamurti points out that these midsize businesses targeted by the Main Street Lending Program account for about a third of GDP and “it’s a real problem that we are failing to provide them with sufficient economic relief”.

And in case you were not aware, some of them are in serious need of economic relief. Earlier this week, a group of individuals from the hotel industry wrote to President Trump: “We strongly urge you to use your executive authority to direct the Treasury to encourage the Federal Reserve to amend and expand the Main Street Lending Program.”

A recent survey conducted by the Fed found that more than half of participating banks said they rejected Main Street loan requests from companies that were "creditworthy before the COVID-19 crisis, but too severely impacted to remain viable and hence unable to repay the loan." Looks like we have a textbook instance of adverse selection our hands here. If and how the Fed and Treasury breath some life into this program bears watching.

The Fed’s asset purchases continue at $80 billion worth of treasury and $40 billion worth of mortgage backed securities per month. They show no signs of slowing down.

The yield on the benchmark 10-year U.S. Treasury is 0.74% down from 0.77% last week.

Next FOMC meeting is Nov. 4-5. No action expected.

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: cc7da3-396ed3-9470e8-d09e9a-23947d

Don't Miss Out
First Month Free

Events

Tickers

Trending tickers in our research