MNI INTERVIEW: Ex-Fed Sheets: Fed Is All In On 2008 Playbook

By Evan Ryser

     WASHINGTON (MNI) - The Federal Reserve will likely re-open its 2008

playbook of extraordinary tools in response to the coronavirus such as lowering

rates to around zero and establishing liquidity facilities, former Fed official

Nathan Sheets told MNI.

     The FOMC will likely cut rates 50bps or more at next week's FOMC meeting

and follow with more cuts at the end of April. "There is a good probability to

be at the zero lower bound by the end of April," Sheets said.

     "The Fed has made clear that they are all in in fighting this crisis. They

have taken out the 2008 playbook and are going to be vigorous," Sheets said, a

former Treasury Department official now at PGIM Fixed Income. 

     "We have seen a significant deterioration in liquidity in the bond market

including in the government securities market over the last few days," Sheets

said. 

     He spoke before the New York Fed launched a set of liquidity measures on

Thursday afternoon and didn't respond to a request for follow-up comment.

     Lowering interest rates and keeping cash flowing through the financial

system aren't enough when the main problem is supporting industries facing a

short-term disruption, Sheets said. That effort needs more support from

governments, Sheets said, and on late Thursday Senate Republicans were wrangling

over a House bill and White House requests for aid to be released in the next

day or so. 

     "It is getting the liquidity to the folks who need it that's the

challenge," Sheets said. "The Fed can't do this alone" he said, and "there are

certain disruptions here that monetary policy is not going to be able to

address."

     A fiscal package must be timely, targeted, and capable of getting into the

income stream quickly, he said. Stimulus packages announced by the U.K and Italy

have been around 1% to 1.5% of GDP, which would require the U.S. to spend USD200

to USD300 billion.

     An extension of April tax payment which Treasury Secretary Steven Mnuchin

says would amount to a USD200 billion boost is "helpful," Sheets said, but it is

not going to have a big enough impact on GDP as other immediate direct spending

     So far coronavirus impacts are not expected to "fundamentally tear the

economy's productive capacity," he said, adding the energy industry is

vulnerable. "This will pass in a couple of months."

     "I expect that a whole swath of firms are not going to go out of business,

that they are going to be able to find bridges to get to the other side," Sheets

said. "And that is where the fiscal is helpful, in that it builds those

bridges."

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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