Failure to slow the spread of COVID-19 could spark a full-blown financial crisis, Fed president says

The coronavirus’ hit to revenues risks a wave of bankruptcies and backs up the Federal Reserve’s relief efforts, James Bullard, president of the Federal Reserve Bank of St. Louis, told the Financial Times.

The US is slowly climbing out of its worst recession in nearly a century, yet soaring COVID-19 case counts in Texas, Florida, California, and other states have revived fears of a second major outbreak.

The country is “still in the middle of the crisis here,” Bullard said, and virus-fuelled insolvencies could lengthen the already severe economic downturn.

“Even though we got past the initial wave of the March-April timeframe, the disease is still quite capable of surprising us,” Bullard told the Times in an interview published Wednesday.

“Without more granular risk management on the part of the health policy, we could get a wave of substantial bankruptcies and [that] could feed into a financial crisis.”

The central bank has recently faced pushback for its continued use of corporate debt purchases.

Fed Chairman Jerome Powell has described the policies as necessary to maintain healthy market functioning and avoid a financial-sector meltdown.

Yet House legislators have questioned their necessity and whether they encourage outsized risk-taking among speculative investors.

Bullard concurred that the unprecedented liquidity programs are “controversial” but echoed Powell in supporting their continued use.

“With all these programs the idea is to make sure the markets don’t freeze up entirely, because that’s what gets you into a financial crisis, when traders won’t trade the asset at any price,” Bullard said.

“It’s not my base case but it’s possible we could take a turn for the worse at some point in the future.”

The St. Louis Fed chief doesn’t expect the current economic slump in its current state to be as difficult for policymakers as the financial crisis.

Officials have repeatedly noted the downturn is a result of a unique health crisis and not a symptom of private-sector malfeasance. A more coordinated policy response across the world’s central banks also helped cushion the global economy against a sharper plunge, Bullard added.

“Here, for all the difficulty and human tragedy around the pandemic, this is a well-understood shock,” he said.

“There has been more unity both inside and outside the Fed about what the policy response should be and even globally that’s been true.”

This article first appeared on Business Insider Australia, Australia’s most popular business news website. Read the original article. Follow Business Insider on Facebook or Twitter.

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