An economic recovery in this crisis depends on health policy, Richmond Fed president says

Economic stimulus money can help soften the blow of the current crisis, but businesses that have been shut down by the coronavirus pandemic likely won’t see a significant recovery until consumers — whose spending drives 70 percent of U.S. economic activity — are confident that the health risk is under control, the president of the Federal Reserve Bank of Richmond said Tuesday.

“Until people are comfortable shopping or traveling or eating out, you can throw as much money into [economic] stimulus as you want, but you are not going to get the reaction you want,” Thomas I. Barkin, the Richmond Fed’s president and CEO, said on a conference call with business leaders hosted by the Greater Washington Board of Trade.

Businesses will need to adapt to that reality even if COVID-19 infection rates slow, perhaps allowing some easing of government-ordered closures across swaths of the retail, restaurant, entertainment and hospitality industries, he said.

“I think every consumer business in this country is going to need a set of protocols” to assure shoppers that their health concerns are being taken seriously, said Barkin, who has been the Richmond Fed president since January 2018.

That may include continued social distancing rules, extra sanitation measures and health screenings for employees. For instance, Barkin noted that some grocery stores now have employees sanitizing shopping carts for every customer.

“There is going to be a lot more hesitation” among consumers, he said. “We are going to have to think about how we present ourselves as businesses to convince people to take that extra step.”

Jeffrey M. Lacker, Barkin’s predecessor as the Richmond Fed president, said in a separate interview Tuesday that the economic contraction caused by the coronavirus pandemic has a different character than previous recessions.

He described it as a “very rapid, very deep contraction,” but one that is potentially shorter than a typical recession. For instance, the Great Recession stretched from December 2007 to June 2009.

“This is clearly a temporary disturbance,” said Lacker, who served as president and CEO of the Richmond Fed from 2004 to 2017 and is now a distinguished professor at the Virginia Commonwealth University School of Business.

“It is sort of built into this that we are going to do this [social distancing] for a while, and then we are going to undo these restrictions and allow the activity we used to have,” he said.

“There is a case that could be made for a fairly rapid rebound” once the restrictions are eased, said Lacker, who spoke Tuesday to local business leaders on a call hosted by the VCU School of Business.

“On the other hand, there is a question as to whether there are some more permanent adjustments that will take place,” he said.

Among those are whether consumer behavior changes as a result of the pandemic, whether it could speed a shift in shopping from bricks-and-mortar stores to online retail, and how long it takes for people to rebuild savings they may be using during the slowdown.

“Those could leave a more lasting imprint on activity and slow the recovery down,” Lacker said. “There is going to be a period of time in which we rebuild the savings we are drawing on now to get though this. That will dampen the recovery a little.”

The economy has experienced — and will continue to have — massive job losses. Nearly 10 million Americans submitted initial claims for unemployment benefits in the last two weeks of March. Virginia logged more jobless claims during those two weeks than it did for all of 2019.

Those job losses, Lacker said, have fallen disproportionately on Americans without college degrees, as white-collar workers are more likely to have jobs that can be done with a computer and a phone at home. “The burden is not falling evenly across our population or our labor force,” he said.

The $2 trillion economic stimulus “is really about re-allocating risk in some sense,” Lacker said. “It is about ensuring that the economic loss that the people we have sent home from work are experiencing can be shared across the economy rather than just the burden falling on those sectors we have asked to go home.”

While the Fed took a leading role in addressing the Great Recession of 2007 to 2009, Barkin described the Fed’s role in this crisis as “at best, a third chair — a highly active third chair, nonetheless.”

“This is at its core a public-health emergency,” said Barkin, who is not a voting member this year of the Federal Open Market Committee, a panel of rotating regional bank presidents and Fed board members that meets regularly to set the federal funds rate. He will be a voting member in 2021 as he was in 2018.

The Fed has taken actions such as lowering interest rates to zero — its most dramatic step aimed at stimulating the economy since the Great Recession.

The $2 trillion federal stimulus package will help, including loans to small businesses and the $1,200 stimulus checks promised to many Americans, but it will take time for that money to arrive and work its way into the economy, Barkin said.

While some Americans can receive that money by electronic deposit into their bank accounts, much of it will have to be mailed. “The [U.S.] Treasury has a real challenge trying get that money into the hands of people,” Barkin said.

Former Federal Reserve Chair Janet Yellen said Monday that economic data in the U.S. could reach levels not seen since the Great Depression, but the country’s health preceding the coronavirus pandemic should place it in a good position for recovery.

The jobless claims are an “absolutely shocking” number that indicates the unemployment rate is probably about 12% to 13% and is moving higher, Yellen told CNBC in an interview. Gross domestic product could contract at least 30% in the second quarter on an annualized basis, she warned.

“This is a huge, unprecedented, devastating hit and my hope is that we will get back to business as usual as quickly as possible,” Yellen said. “Unemployment rates for a time may go to Depression levels, but this is very different than the Great Depression or the recession in the U.S. economy that we experienced in 2009 and after.”

The key to a quick recovery is making sure people’s incomes remain supported and their ties to employment stay intact during the shuttering of the economy, said Yellen, who stepped down from the Fed in 2018 and is now a distinguished fellow at the Brookings Institution in Washington.

“A ‘V,’ which is what we’re all hoping for, is really a best-case scenario and if activity could begin to resume as many assume in June and maybe be back to something more normal by the summer I think a ‘V’ is possible,” she said. “But I am worried that the outcome will be worse.”

Barkin said he is “very concerned” about the size of the federal debt, which now stands at around $23.5 trillion.

However, “you need government to be spending right now. I am not an opponent of the fiscal measures,” Barkin said.”

“This is a not a situation where one set of businesses did something wrong and they are now asking to be bailed out,” he said. “On the back end, we ought to have a business plan that gets our fiscal house in order.”