Let's Move Forward, Not Back

Since the beginning of the coronavirus crisis, the Federal Reserve has probably done more to try to ease the financial pain of businesses, consumers, and institutions than just about any other organization on earth with their monetary policy. It’s lowered interest rates, purchased trillions of dollars of assets – some of which, like corporate bonds, it’s never bought before – eased bank capital requirements, and increased existing or created new lending programs to help Americans weather the storm and get back on their feet.

Now the president of the Minneapolis Fed and a current voting member of the Fed’s monetary policy committee is calling on people to suffer a few more weeks in quarantine in order to get the virus under control and the economy back on an upward trajectory – as if it weren’t on that already.

“If we were to lock down really hard, I know I hate to even suggest it. People will be frustrated by it,” Neel Kashkari told CBS’s Face the Nation program. “But if we were to lock down hard for a month or six weeks, we could get the case count down so that our testing and our contact tracing was actually enough to control it the way that it's happening in the Northeast right now. That’s the only way we’re really going to have a real robust economic recovery.”

“Now, if we don't do that and we just have this raging virus spreading throughout the country with flare-ups and local lockdowns for the next year or two, which is entirely possible, we're going to see many, many more business bankruptcies, small businesses, big businesses, and that's going to take a lot of time to recover from to rebuild those businesses and then to bring workers back in and re-engage them in the workforce. That's going to be a much slower recovery for all of us.”

If we take his advice and do another “hard lockdown” for six weeks or a month, how many more businesses will fail, and how many more people will be laid off or lose their jobs permanently in the meantime? While the Fed has done a ton of work to ease the pain, the fact is it’s only temporary. Even if “temporary” winds up being a few years, the Fed won’t be around to help those people who have lost their jobs permanently or had their businesses fail.

As it is, the economy has made a lot of progress since the country started to open up. Retail sales are almost back to where they were before the lockdown. Initial unemployment claims have started to trend downward. More than 6.6 million people have been added to private payrolls in the past two months. The unemployment rate has dropped to 10.2% from 14.7% in April. Other economic indicators are pointing to a V-shaped recovery. Why ditch all that and throw the economy back into reverse?

The fact is, just like the seasonal flu and other diseases, coronavirus is another thing that we are just going to have to find a way to deal with and control without a massive shutdown of the economy. It’s also not certain that another lockdown is going to slow or eradicate the virus when the first lockdown didn’t do it.

I think what bothered me the most about Kaskari’s statement was the level of arrogance he displayed. As a voting member of the Fed’s monetary policy committee, arguably the most important body fighting the economic consequences of the virus, he is absolutely in no danger of losing his job or his paycheck or running behind on his mortgage. While policymakers like Fed members and legislators and military generals and the like shouldn’t make decisions based on the lowest common denominator, they should be a little bit more sensitive in their public statements. To his credit, Kashkari did say he “hated to even suggest” another lockdown, but the U.S. economy isn’t a big social experiment. We’re dealing with people’s lives, including economic and financial, not just health.

Winning the medical battle against the virus and getting our economy back to where it was before February doesn’t seem to require an all-or-nothing approach. We can keep the economy open while at the same time trying to minimize the spread of the disease. Granted, more aggressive steps may have to be done to accomplish that. Reckless personal behavior has to be stopped and punished if it comes to that. It won’t be easy, maybe, but another lockdown must be avoided.

Loose monetary policy, massive amounts of asset purchases, and new lending programs – including those that are basically government grants in disguise – are only temporary expedients to dealing with the crisis, not long-term or even permanent fixes. We’ve already seen the economic consequences of a lockdown; we may not be able to survive another, certainly nothing that the Fed doing “whatever it takes” will be able to fix.

That also assumes that the American people will tolerate it. We know that a lot of them won’t. So a middle road between an open economy and virus mitigation seems like the best approach.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.