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The repair of financial market conditions since the depth of the coronavirus crisis in mid-March is positive for the economy, but may not last, said Federal Reserve Vice Chairman Richard Clarida on Tuesday.
“While this easing of financial conditions is, of course, welcome to the extent that it supports the flow of credit to households and firms during this challenging period, it may not prove to be durable, depending on the course that the coronavirus contagion takes and the duration of the recession that it causes,” Clarida said in a speech to the Foreign Policy Association.
The Fed has bought $2.3 trillion of Treasurys and agency mortgage-backed securities to smooth market functioning. The Fed indicated last week that the purchases will continue in coming months at the current pace over $80 billion per month for Treasurys and about $40 billion per month for MBS.
“At minimum, the easing of financial conditions is buying some time until the economy begins to recover,” Clarida said.
Some members of the Senate Banking Committee expressed concern earlier Tuesday to Fed Chairman Jerome Powell about the asset purchases and the size of the Fed’s balance sheet.
Sen. John Kennedy, a Republican of Louisiana, asked Powell how long it would take to reduce the Fed’s $7 trillion outstanding “to some amount that wasn’t other-worldly.”
Powell said these purchases were not meant to lower credit spreads or the help the Treasury finance the federal debt.
Read:Powell says economic activity far below pre-pandemic levels despite ‘modest rebound’ in some areas
“I don’t see us as wanting to run through the bond market like an elephant,” Powell said, referring to the Fed’s separate $250 billion program to purchase corporate bonds.
“We just want to be there if things turn bad in the economy,” Powell added.
