August 6, 2020

Whatever It Takes: How the Fed Aims to Rescue the Economy

The Fed, along with other financial regulators, on Sunday announced new steps intended to encourage banks and other lenders to cut borrowers some slack during the pandemic.

Imagine a small business that took out a loan last year to fund an expansion. Now the business has had to shut down temporarily because of the coronavirus outbreak, and the owner is having trouble making payments. Given the circumstances, the bank that made the loan may be willing to make some accommodations — deferring payments, perhaps, or extending the loan for a few months. But if the bank makes too many modifications, it could run into trouble with regulators concerned about excessive risk.

On Sunday, the Fed and other regulators basically said to go ahead and modify loans to help businesses survive. “The agencies encourage financial institutions to work with borrowers,” the regulators said, and “will not criticize institutions for doing so in a safe and sound manner.”

There is a consensus among economists that until the outbreak is brought under control, economic policy can do only so much. And while the Fed has greatly expanded its toolbox in recent years, there are steps that only Congress can take, like sending checks to individual households, cutting taxes or providing aid directly to state and local governments or to businesses.

But the Fed’s advantage, Ms. Meyer said, is speed.

“The Fed is moving quickly, they’re being creative, and they’re doing whatever they can to support the flow of credit in the economy,” she said.

Will that be enough? “Time will tell,” she said.

Jeanna Smialek contributed reporting.

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