Looking Back, Looking Forward – Janus

Looking Back, Looking Forward – Janus


Pessimist: “It can’t get any worse than this!”

Optimist: “Sure, it can.”


Even in these days of raging pandemic, it’s important to look ahead and prepare in advance. For that, it’s necessary to assess the current circumstances based on the challenges that have been overcome and use the experience to adjust the way forward.   It is this sense of calm and confidence that the Federal Reserve tries to project, a learned stance as it were, as it looks back  after an early bout with the disease.



The Federal Reserve explains (“Optimism in the Time of COVID,” Vice Chair for Supervision Randal K. Quarles, September 23, 2020) that though the economic shock received in the first of half of 2020 was enormous, a recovery is underway and the Fed is taking steps to bolster its response.  For example, in the financial sector, where the Fed used the emergency authority to establish 13 lending facilities to provide support to households, financial firms, non-financial businesses, non-profit organizations, and municipal governments, it is now requiring that banks review and reassess their capital needs in the face of continued uncertainty and resubmit their capital plans. For non-bank financial firms—those that felt the brunt of liquidity strains—the Fed is in the process of putting in place a measure to improve resilience.

In terms of the economy, the Fed indicates that the unemployment rate stands at 8.4 percent, which is still high but nonetheless, an improvement from 14.7 percent in April and consumer spending, while there were plenty of sectors depressed, has remained stronger than expected, largely buoyed by retail sales for consumer durables, e.g., automobiles, furniture, and home improvement, etc.

Still, the Fed concedes that the economy is inexorably dictated by the path of the pandemic and states that:

  • The full economic recovery from the COVID-19 recession has a long way to go as it threw the economy into a “very deep hole”;
  • Although the unemployment rate has declined sharply since April, it will take some time, perhaps another year, for the level of GDP to fully recover to its previous 2019 peak; and
  • It will likely take even longer than that for the unemployment rate to return to a level consistent with the “maximum-employment mandate.” (“U.S. Economic Outlook and Monetary Policy,” Vice Chair Richard H. Clarida, Oct. 14, 2020)

Lessons Learned

Looking back at how the economy has fared and withstood the onset of exigent shocks brought on by the COVID event, the Fed summarizes the lessons learned as follows (“What Happened? What Have We Learned From It? Lessons from COVID-19 Stress on the Financial System,” Vice Chair for Supervision Randal K. Quarles, Oct. 15, 2020):


First:  Fragile short-term funding markets

Several short-term funding markets proved fragile and needed support.  The shortening of maturities in the commercial paper market was similarly reminiscent of the global financial crisis of 2008. The short-term funding markets remain an unstable source of funding in times of considerable financial stress.

Second:  The Treasury market is not immune. 

The treasury market is not immune to the problems of short-term and dollar funding markets. In light of the importance of the Treasury market to many other financial markets as well as to monetary and fiscal policy, this further heightens the need to think about additional steps addressing vulnerabilities in short-term funding markets.

Third:  The System Worked! 

The regulatory framework for banks constructed after the global financial crisis, with the refinements and recalibrations enforced over the last few years, held up well.  In other words, the “system worked”:  there was no recurrence of the problems faced by the banking sector during the crisis, and instead, banks have been a source of strength.  Furthermore, all the measures targeted towards financial markets, non-bank financial institutions, and the real economy were an “unmistakable signal to market participants of the capability and willingness of the Fed to restore market functioning, and the fact that this functioning was restored so quickly, with relatively little borrowing, shows this message was received, and believed.” into the uncertainties and challenges of the future, it’s worth repeating the truism that has been a useful reminder time and again:  “It’s difficult to predict, especially about the future.” But one can be ready by effectively managing the risk and if there were ever a time for preparation and risk management, this should be it.  Now is the time to improve and strengthen and VERMEG stands ready to help.

Paul Baik