Fed minutes: rates at zero until economy weathers coronavirus

The Fed Minutes show alarm over coronavirus disruptions to the economy. Yahoo Finance's Seana Smith, Brian Cheung and Nareit Senior Vice President and former Federal Reserve economist Calvin Schnure discuss.

Video Transcript

SEANA SMITH: We have the FOMC minutes. They are coming out momentarily. This will give us insight into the emergency announcement in March, where the Fed slashed rates to 0, also restarted QE. We're going to have more on that in just a few minutes.

But, first, I want to bring in Calvin Schnure, a former Fed economist and now senior vice president at Nareit. And, Calvin, thanks so much for taking the time to join us this afternoon. FOMC minutes, we're going to get more details on what exactly they are now any second. But what should we be focusing on in this report? And why is this so different than what we have received in the past?

CALVIN SCHNURE: Well, this will be very different from most times when we get an announcement because, typically, there will be one FOMC meeting. They make a statement. And then we get the minutes sometime later.

Now, the past month has probably been one of the most active months for the Federal Reserve ever. They cut interest rates practically to zero three weeks ago. Two weeks ago, they expanded a lot of their programs to include support for agency CMBS, for corporate bonds, for commercial paper, for municipal securities. And they said that they will be introducing a Main Street program to support small businesses, so they've had a tremendous expansion of the programs.

So what are we going be looking for in the minutes? A couple of the policy measures that we typically look for really are not an issue. Interest rates, they're cut to basically zero. We don't expect any news there.

QE, they've announced they're doing QE. They're carrying it out. It's helping support the markets. I don't expect anything there.

What would be really interesting is to see these other programs where they'll be issuing credit. What type of discussion was there? Is a broad support for these programs? Are there concerns about implementation, the Fed taking credit risk, or so on? I want to see how solid the support is for these new programs and what they might have in mind for future.

SEANA SMITH: Calvin, the Fed has shown a willingness to act very quickly. When we look forward, just in terms of what we could expect from the Fed here in the future, at least in the very short term, do you expect the Fed to continue to be nimble going forward here to address any additional concerns?

CALVIN SCHNURE: Yes, yes, they will, certainly. What we've seen right now is, over the past couple of weeks, the Fed put in place in literally two weeks what it took them three months to do in 2008. That's because they had a lot of programs that have been tested during the crisis. They knew that these worked. They knew how to put them in quickly.

Chairman Powell had his TV interview not too long ago, unprecedented interview just to discuss what's going on. And he made it clear the Fed is not out of ammo. We will do whatever we can to support the economy. They do not want to see the type of collapse that was on the verge of happening in 2008. The Fed is all in on this game.

SEANA SMITH: Calvin, when we try to just figure out, try to gauge the economic impact that the coronavirus could have on the US economy. At this point, there is one headline that just crossed that the Fed minutes obviously showed some alarm here over the COVID-19 disruptions to the economy. What do you think the extent of those disruptions could be?

CALVIN SCHNURE: Well, the real issue is that, for most businesses, small businesses, shops, and a lot of large businesses as well, the cash flow has grown to a halt, almost a complete halt. And that's not something that is in anyone's business plan.

So those stoppages of the money then cascade through the rest of the payment stream. They hit employees. The first thing that we've seen is the workers who are laid off and may not have money.

But it hits other people, too. It hits the vendors, the other companies that are upstream. It hits the lenders. It hits the banks who are, all of sudden, not going to be getting money on the loans or they may need to draw down a line of credit. It also hits the landlords, the owners of the properties, who may not be getting rent payments.

These are critical areas, and we need to see things that are going to be helping support the landlords, REITs, real estate investment trusts, other landlords that may be granting someone some leniency on their lease payment. We're going [INAUDIBLE] see with mortgages. Basically, we need to cover this gap until the economy gets going again.

SEANA SMITH: And Calvin, another headline here coming out from the minutes, saying that rates are at zero until the economy weathers this virus. When we talk about the data that we are paying the closest attention to, when we talk about the data that the Fed is closely looking at, at this point, what do you think that is?

CALVIN SCHNURE: Well, I take my cues from Chairman Powell, and he takes his cues from Dr. Anthony Fauci, which I think is a very good thing. Dr. Fauci is the best source we have on how much progress the social distancing will be making in slowing the spread. We need to slow the spread of the virus before you can get the economy going again because you cannot have a healthy economy unless you have healthy workers.

So we're still several weeks out from really being able to gauge the progress there. So we're going to have to hunker down and provide a cash flow support for businesses, for landlords, property owners, for lenders that they need for April, May, maybe even into June.

SEANA SMITH: Yeah, Calvin, I mean, the big question mark here are some the numbers that we've gotten now that have been extremely alarming are some of those unemployment numbers. So in the month of March was really, effectively, before we started to see the extent of the coronavirus shutdown just across the country.

Well, we already had 701,000 jobs lost in the month of March. And that data only goes through March 12. When we take a look at what we could expect on the unemployment front, how are you reading that situation at this point?

CALVIN SCHNURE: What we've seen in jobless claims over the prior two weeks, that alone could translate into unemployment rates reaching 15%, 18%, 20% by May or by June. So we're really looking at something that's going to be very severe. The April jobs report could well show a loss of 10 million, 15 million jobs. It's really hard to gauge just how big it is. All we know is it's going to be huge.

The real question, though, is, how long are these people laid off? Are they temporary laid off? Or are they called back within a couple of weeks of when the economy starts to go again? Is it going be a couple of months? Or are they permanent?

That's going to be the really critical question. We don't know the answer yet. But that's going to determine whether we have a healthy recovery, a long, drawn-out recovery, or a very difficult time ahead.

SEANA SMITH: All right, Calvin. I want you to stay right there. I want to bring in our Brian Cheung. Brian, you've been passing through these minutes. Just in terms of anything that stands out to you at this point, are there any new insights that we gain from these minutes?

BRIAN CHEUNG: Yeah, well, first of all, we need to step back and recall that meeting minutes that were released today only cover the March 15 emergency meeting on that Sunday night. This was before a number of those liquidity facilities were announced by the Fed, so this covers slashing rates to zero, resuming QE with no ceiling-- although it wasn't necessarily infinity QE at the time-- and then also things regarding the discount window, some tweaks, and the banks, ultimately, ending up to choose to suspend their share repurchases after the fact.

So the Federal Reserve said that the US economy entered that meeting on a strong footing. But all participants on the FOMC said that they saw the outlook as having, quote, deteriorated sharply. They said business sectors and foreign economic growth were, quote, badly hit. Several participants actually said they worried about the capacity of the US health system. I want to read you this interesting bit from the minutes, said, quote, sorry, quote, "Several participants emphasized concern about the capacity of the health care system in the current situation and welcomed measures taken to prevent the system's overall capacity from being exceeded," end quote.

This underscores the Federal Reserve's concern that this is mainly a health problem, that monetary policy can only do so much. A few other nuggets from the minutes, a number of participants on the committee said that the Fed's efforts to relieve stress in the financial markets was, therefore, a big priority because the health concern is something that only fiscal policymakers and the White House could really handle. And one thing that's also important to remember is that, even though they slashed rates to zero, it was not unanimous.

You had the Cleveland Fed President Loretta Mester actually dissenting from that decision, preferring only a 50 basis point cut as opposed to a 100 basis point cut in that meeting. Minutes show that she wasn't the only one. They said that, quote, "A few participants preferred a 50 basis point cut in that meeting, and they wanted to see and wait to see if there was greater assurance that the mechanism of the monetary policy could ease conditions."

Keep in mind, Mester is the voting member. That's why we know for sure that she did vote against that decision. But there are a number of non-voting Fed presidents on that committee that also apparently were in line with that thinking.

Lastly, one thing in the minutes is that the participants said that the committee wanted to clearly communicate that they had more bullets left. This is a main concern. After the Fed slashed to zero, there are a lot of commentators saying, that's it. That's all that they can do.

But the committee wanted to reassure the public that there was more that they could do beyond hitting the effective lower bound, things like forward guidance or further things on the balance sheet, which they, ultimately, end up doing by taking the caps off of the quantitative easing program. But, again, all those things [INAUDIBLE] encompassed in these Fed minutes that were just released. Seana.

SEANA SMITH: Thanks there, Brian. Calvin, I want to get just your thoughts on what we just heard from Brian because there's still an extreme large degree of uncertainty, it seems like, in the Fed's outlook at this point. And, when we talk about how long could take for some of the economies around the world to normalize, it almost seems that we don't have any timetable or we could be sure of any timetable at this point.

CALVIN SCHNURE: That's right. We don't have any timetable. And the public health authorities have said the virus is going to determine the timetable. We can't tell when the economy can get back to business until we know when it's safe for it to get back to business.

The comments that Brian made are really spot on in terms of saying the Fed is not out of ammo. And stop and think for a minute, what is wrong? In a typical economic slowdown, businesses are making some decision about future investment, and they are evaluating the return on investment. So you cut interest rates, and that's going to help you out.

Well, that's not what's going on here. First of all, interest rates are practically zero. And the other is the cash flow's not coming in because the virus is out there. And they need immediate funding to get them through the period until the cash comes in again.

That's why they have a lot of ammo to the extent they have lending programs. They can work together with the Treasury to put up these lending programs and put hundreds of billions, of trillions of dollars into the businesses, the small businesses, and the households, the financial markets to tide us over until the cash flow starts going again as the economy gets back up to speed. So this is actually a very, very accurate diagnosis of the problem facing the economy, and the Fed does have the tools to address it.

SEANA SMITH: And Brian, I just wanted to ask, just in terms of getting the money out, like the lending programs that the Fed has been focusing on, how important is it to get those checks out at a very quick pace, just in terms of the impact that it could have on GDP in the short term?

BRIAN CHEUNG: Well, it's extremely critical. You have the New York Fed survey released yesterday, saying that most businesses could not withstand a 60-day stop in their revenue without having to at least lay off workers or close entirely, which is why the timing is really of the essence for these PPP loans that we've been talking about. Ever since the SBA and those lenders tried to launch that program last week, there's been so many logistical problems in actually getting the money into the hands of those businesses that desperately need them.

Every day that goes by is more money that they're hemorrhaging through either rent or labor costs or trying to retain their employees, which means a higher likelihood of those businesses closing. The minutes really underscored that this Main Street impact was something that the Federal Reserve is incredibly worried about. But, again, we have to remember that these meeting minutes were for that March 15 meeting before they were trying to think about the creative ways by which they could backstop financial markets to encourage this type of small business lending.

And the Federal Reserve is not done yet. They still have that Main Street lending facility, which they announced but don't have details on yet. That's apparently forthcoming.

SEANA SMITH: All right, Brian Cheung and Calvin Schnure. Thanks so much for joining me this afternoon.