MNI INTERVIEW: Fed Needs Targeted Stimulus Over Cuts: Raskin

By Pedro Nicolaci da Costa

     WASHINGTON (MNI) - The Federal Reserve should look at new tools to fight

credit freezes and economic downturns because rate cuts won't do enough against

the growing risk of recession due to the coronavirus, former Fed Governor Sarah

Bloom Raskin told MNI.

     "The Fed should be thinking about different things, but I would argue a lot

of them aren't ready," for this kind of shock, said Raskin, who was also Deputy

Treasury Secretary under President Barack Obama, in an interview. None of the

Fed's current seven-member board, which has two vacancies, were at the central

bank for the 2008 financial crisis when policies went beyond regular rate cuts

to special lending facilities and bond purchases. 

     The Fed's decision to cut interest rates by a half percentage point in a

rare intermeeting move last week was "largely symbolic," and showed they are

"getting so close to the zero lower bound that they clearly have to have more

things in their medicine bag," she said.

     "The risks of a recession have increased given the exposure of particular

vulnerabilities in the way our economy is structured," she said, citing the lack

of paid sick leave and insurance for many workers.

     The Fed meets next week and is expected to cut again by at least another

25bps, if not another 50bps, as global stock and bond markets crater and oil

prices slump the most in decades. Another half-point cut would leave little room

to spare before hitting the zero bound. Fed officials in recent days have touted

the added lift that could come from fiscal policy as they may be left with

unconventional tools such as QE, forward guidance or even expanding the Fed's

power to buy assets beyond Treasuries. 

     Raskin said the main policy response should be fiscal and targeted to

ensure money flows into the right hands. She scoffed at the size of Congress'

USD8.6 billion spending bill, which she called "baby stimulus" and merely

"playing catch up."

     "You have to have some conditionality imposed on any stimulus package,"

Raskin said in an interview Monday, to ensure major investment firms don't reap

a taxpayer-funded windfall from betting on distressed stocks and bonds, she

said. "We can't just open the spigots and essentially bail out the private

equity firms that are holding all this debt."

     Markets lack confidence in the White House's response and even its ability

to tell the truth about the extent of the epidemic, she said, which will make it

harder for traders to find a bottom.

     "And we were already at slow growth. We're like a plane that's flying

already low to the ground so any kind of turbulence could run us aground," she

said.

     "What I'm watching is the tip from a supply side shock into a demand side

shock," Raskin added. "If this morphs into a demand side shock then we're going

to run the risk of firms facing reduced consumer demand for their product which

could potentially move firms into a cost cutting mode that could cause them to

lay off workers."

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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