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Fed’s Bullard says risk of financial crisis remains

A senior Federal Reserve official has warned that a wave of business failures owing to the pandemic could still trigger a financial crisis, as he justified the central bank’s continuing efforts to prop up capital markets.

“We’re still in the middle of the crisis here,” James Bullard, president of the Federal Reserve Bank of St Louis, said in an interview with the Financial Times on Wednesday.

“Even though we got past the initial wave of the March-April timeframe the disease is still quite capable of surprising us,” he said. “Without more granular risk management on the part of the health policy, we could get a wave of substantial bankruptcies and [that] could feed into a financial crisis.”

Mr Bullard’s comments came as Fed officials were assessing the economic impact of a new spike in infections in large US states including Texas, Florida, California and Arizona, which threatens to derail the nascent rebound from the initial pandemic shock.

“In any crisis, I think we need to keep in mind that there can be twists and turns, there can be another shoe to drop, and that could happen here,” he said. “And for that reason I think it’s probably prudent to keep our lending facilities in place for now even though it’s true that liquidity has improved dramatically in financial markets.”

The Fed has faced criticism that it has gone too far in its efforts to shore up financial markets — artificially inflating asset prices and helping corporate America at the expense of Main Street, while adding to income inequality. 

The Fed now has two facilities in place to buy corporate debt in the primary and secondary markets, including bonds that have fallen into higher-risk “junk” territory — terrain into which the US central bank had never ventured before.

Mr Bullard acknowledged the schemes were “controversial” but said corporate debt liquidity had been “sorely tested” early in the crisis and the Fed facilities served as an important “backstop” even if they were not being used much.

“With all these programmes the idea is to make sure the markets don’t freeze up entirely, because that’s what gets you into a financial crisis, when traders won’t trade the asset at any price,” he said. ” It’s not my base case but it’s possible we could take a turn for the worse at some point in the future.”

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