The Federal Reserve’s next front in the battle to support the U.S. economy is to prevent millions of American small businesses from becoming the Achilles heel of the recovery.
Fed Chairman Jerome Powell told the Senate Banking Committee last week that he’s concerned about America’s “jobs machine” — its small and medium sized firms — tipping into bankruptcy and destroying the “work of many families and generations.” If that happens, there will be fewer jobs when state governors declare it’s safe for households to go back to work.
The central bank is tasked with avoiding that outcome through its Main Street lending program approved by Congress, but it’s already proved a harder endeavor than imagined. The Fed is under increasing scrutiny about the facility — one of its riskiest undertakings ever — because it’s still not operational.
Fed officials are aware that the destruction of Main Street could be incipient and hard to detect in big, macro-data sets — as smaller towns and rural areas see stores disappear one by one, or a handful at a time. As a result, they’re renewing contact with local leaders that they established in listening sessions over the past year to get first-hand information, and relying on reserve bank community networks.
“Looking at aggregate data does not cut it with the risks the economy is facing now,” said Claudia Sahm, the director of macroeconomic policy at the Washington Center for Equitable Growth. Sahm was chief of a research section at the Fed Board in Washington from 2017 to 2019 that worked with real-time big data tools.
“The Fed has to watch its real-time data on employment and consumer spending every day if it wants to stay ahead of an adverse loop of disappearing paychecks and folding businesses,” she said.
In response, Fed Board staff are drilling down into private-data sets from the hospitality industry and using sources such as OpenTable, Google’s Community Mobility Reports and SafeGraph Inc. to get a sense of foot traffic. They’re also tapping anonymized data from small business software provider Homebase and ADP LLC to get a sense of hours and workforce dropout rates. And they’re looking at high frequency small business formation data from the Census Bureau.
Meanwhile, U.S. businesses are starting to learn how customers are adapting to social distancing and other cautions as states reopen to varying degrees. Small- and medium-sized businesses are vulnerable because they could get scissored by higher costs of virus-safety modifications and lower revenues.
Bobby Ukrop, chairman of Ukrop’s Homestyle Foods in Richmond, told Powell and his fellow governors in a video conference Thursday that their sales of prepared foods for grocery stores was down 25%. A wage increase planned for the fall is now in question, though he has been able to keep his employees thanks to the Paycheck Protection Program loan, calling it a “bridge to the summer.”
Testifying before the Senate May 12, Fed Governor Randal Quarles said that while market-based policies have helped limit the damage, uncertainties have now “burrowed deep into the marrow of the real economy.”
The Fed’s Main Street lending facility intends to provide an additional backstop. Powell said last week that he expects the loan fund to be up and running by the end of the month. He described it as “in a class by itself” in terms of complexity.
The Fed announced the Main Street facility in March even before Congress had allocated funds to support the program. It will buy four-year loans made to businesses by commercial banks with principal and interest deferred for one year. The Fed published a 19-page guidance sheet on the program last month. The facility can buy up to $600 billion in loans, and is aimed at businesses with 15,000 or fewer employees, or annual revenue of $5 billion or less in 2019.
Boston Fed President Eric Rosengren said Sunday that he expects companies to begin receiving money through the long-awaited program within two weeks.
The Fed’s struggles to deploy the Main Street program contrasts with the central bank’s rapid response in March to fractures in stock, bond and currency markets. Over just nine days that month, the central bank averted a global financial panic by deploying firebreaks in some of the world’s most critical markets.
The quick action happened in part because financial-market risks were on the radar of the New York Fed and Board staff long before they blew up. Over the past decade, Fed officials beefed up their surveillance of financial markets and banks, expanding the Division of the Financial Stability to 50 staff members from 5 at its start in 2010.
The Fed swung into emergency mode March 15, cutting the benchmark interest rate to zero and announcing dollar swap agreements with central banks that it would broaden over coming days. The dollar’s enormous role in global trade and foreign company debt issuance was a known risk, as was the still runnable nature of money market funds and correspondingly the commercial paper market. The Fed’s financial stability unit had also been sending up flares on excessive leverage in the corporate sector for more than a year.
The Fed announced backstops for those problems almost immediately, using what Powell called “unprecedented speed and force,” partly because financial markets signal distress visibly and instantly.
Nevertheless, the Fed anticipated that the economic crisis would reach across businesses of all sizes and announced the Main Street program March 23. Even with the loan facility acting as essentially a bridge loan to the middle segment of American companies, Powell has reminded lawmakers that the answer to this gaping hole in demand may be beyond the limits of what the Fed can provide and require more fiscal support from the government.
“The recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems,” he said in remarks at the Peterson Institute for International Economics earlier this month.
For a central bank that has a full employment mandate, the risk of one small business after another erasing jobs is enormous.
Joanne Chang, co-owner of the Myers + Chang restaurant group in Boston, told Powell and his fellow governors Thursday she hoped to bring all of her 500 employees back. “But realistically with social distancing, we don’t think that is going to be the case.”
— With assistance by Alexandre Tanzi
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