Fed's Bullard: coronavirus fallout will have "unparalleled" economic effects

St. Louis Fed President James Bullard is warning “the numbers for the second quarter will be unparalleled compared to U.S. macroeconomic history.” Nellie Liang, Senior Fellow in Economic Studies at the Brookings Institution joins Yahoo Finance’s Seana Smith to discuss.

Video Transcript

SEANA SMITH: We've been talking about the measures that the Fed have taken in order to try to shore up the economy. They've been making sure that credit is available so that businesses that are shut down will eventually be able to open again. For more on some of the Fed's recent measures, I want to bring in Nellie Liang, Senior Fellow in Economic Studies at the Brookings Institution. And Ms. Liang, thanks so much for joining us this afternoon.

We have been talking about the various effects that the coronavirus is having on the economy. In many instances, the coronavirus has been starting to cripple the US economy. The Fed has taken a few steps that some are saying are even bigger than what was taken back in the financial crisis. Will you try to compare what we're doing now to what we do-- what we did back then? What do you think of that comparison?

NELLIE LIANG: So thank you for having me. So I think-- I think it's important to start with the point that the current crisis is not the 2008 crisis. The current crisis is obviously a response to the pandemic. The 2008 crisis had its origins in the financial sector, and so the responses that the authorities could take, the government and the Federal Reserve, were a little more difficult in the sense of you didn't want to reward the financial sector that got you into the problem in the first place.

Clearly households and businesses that have been hurt by this pandemic are not their fault, in some sense. So the Fed has been able to be very aggressive because they don't have to worry about those incentives, and also they have a playbook that they had, in some sense, and they can build on that.

So some of the programs that they've launched have sort of come right out of that playbook, and it's all in terms of trying to make sure the markets function so that households and businesses can have access to credit that they need to support their spending and investment.

So I think it's been-- they've been very aggressive. They've taken a number of actions, and they've introduced a number of new ones. I think a very important one will be-- that they've announced but have not set up the terms yet. But I believe once the legislation is passed, they'll be able to say something soon, and that's a direct facility to help small- and middle-market businesses that have been hurt by the pandemic. And I think that will be a key element of the new set of tools that they deployed for this crisis.

SEANA SMITH: Do you think the Fed's been proactive enough in their measures? Do you think they've done enough in order to try and get ahead of some of this?

NELLIE LIANG: So I think they have done-- as I said, I think they've been very aggressive. To respond to this crisis, in some ways the first thing is to contain the pandemic itself. They have no role in that. The second thing is you need the government to respond and support the households and businesses that have been hurt. And while they can provide liquidity, they cannot provide the government taxpayer funds that the current bill in Congress can.

So once that's in place, the Fed could probably take even more actions, but in some sense they couldn't wait. You know, financial markets aren't going to wait until there's clarity about the health-care response or the fiscal response. So financial markets need to be able to price risk and return, and when there's so much uncertainty, they can't price the risk.

So when the financial markets get-- become a bit dysfunctional, the Fed can provide liquidity, and hopefully that's a bridge to a more permanent solution, which I believe this new legislation, what it's passed, will be able to reduce the balance of uncertainty and help markets function. I think that's also why we're seeing, you know, the boost in financial markets over the last few days.

SEANA SMITH: Well, one thing that we have been seeing and we've been talking about now is the impact that we've already seen on employment. Obviously unemployment is expected to spike here, at least in the short term. We had the Fed-- the Fed's Bullard speaking earlier, and he was saying that unemployment could spike all the way to 30% in the short term. If we do see unemployment spike all the way to a level-- not even as high as that, but even 20% or 25%, how long do you think it will take for the US economy to get back to what, quote, is normal, that 3% to 4%-- 3 and 1/2% to 4% unemployment that we recently saw?

NELLIE LIANG: So we can-- there can be a spike up. It can also come back very sharply. And, in some sense, that is the goal of all the policies. All the policies-- monetary, financial stabilization, fiscal-- is to get people back to work and small businesses back up and running as quickly as possible.

So the Fed can take some actions to make sure the downturn is not worse than it needs to be, in some sense, from the pandemic and then be ready and in position to let it restart very quickly. So I think payments or unemployment insurance to unemployed workers, loans, and grants to small businesses to help them keep their employees, and if they keep their employees, forgiving those loans, that's part of the package. I think that can help many small businesses.

I think there is also a segment of the middle-market companies, somewhere between small-- which is the SBA, say, under 500 employees-- and the large companies that can access the public debt markets, and I think the Fed is thinking about whether they can try to help provide some credit for that set of companies. All that is to support employees and the relationship that businesses might have with their employees.

So that would-- if you can preserve that with grants or loans, then that will help the economy jump back much quicker.

SEANA SMITH: All right, Nellie Liang, senior fellow in economic studies at the Brookings Institution, thanks so much for joining me.

NELLIE LIANG: Thank you.