Fed’s Bullard urges reopening the economy to avoid depression, Fink on tax hikes to pay for shutdown

Federal Reserve Bank of St. Louis President James Bullard did not mince words on why state and local governments need to end their lockdowns (which New Jersey just extended by another month today, incidentally):

Federal Reserve Bank of St. Louis President James Bullard said policy makers need to mitigate the ongoing risks from the coronavirus in the second half of the year and gradually reopen the U.S. economy to avoid deeper harm.

“The shutdown can’t go on forever because if it does, deep into the second half, then I think you risk getting into a financial crisis or even a depression scenario,” Bullard told CNBC television in an interview on Wednesday. “And if you get into that I think even health outcomes would be way worse.”

The U.S. central bank last week left interest rates unchanged just above zero and has continued to expand its already-historic response to the crisis by broadening some of the nine emergency lending programs the Fed has unveiled since March to keep credit flowing as Americans hunker down to limit contagion.

The St. Louis Fed president said he wasn’t surprised by Wednesday’s ADP Research Institute report that U.S. companies cut payrolls by more than 20 million jobs in April, which he characterized as stemming from a partial shutdown of the economy as a way to ensure public health.

Economists surveyed by Bloomberg expect U.S. government data due on Friday to show the unemployment rate surged last month to 16% from 4.4% in March.

“The jobs report will be one of the worst ever,” said Bullard, who is not a voter this year on the rate-setting Federal Open Market Committee. The St. Louis Fed president predicted the unemployment rate will be “extremely high,” possibly climbing to 20% or above during the shutdown. “I think it can come down under double digits by the end of the year,” he said.

Policy makers need to mitigate the risks of the virus just as they live with other risks, Bullard said, even if scientists are unable to create a vaccine anytime soon.

Meanwhile, BlackRock’s Larry Fink thinks the economic recovery is going to be hindered by punitive tax hikes on businesses:

BlackRock Inc. Chief Executive Officer Larry Fink had a stark message for a private audience: As bad as things have been for corporate America in recent weeks, they’re likely to get worse.

Mass bankruptcies, empty planes, cautious consumers and an increase in the corporate tax rate to as high as 29% were part of a vision Fink sketched out on a call this week. The message from the leader of the world’s biggest asset manager contrasts with the ebullient tones of a stock market that has snapped back from recent lows.

Even among Wall Street luminaries, Fink speaks with particular clout. He has been advising President Donald Trump on how to navigate the effects of the coronavirus pandemic. And BlackRock is playing a key role in the Federal Reserve’s efforts to stabilize markets, helping the central bank buy billions of dollars in assets.

Fink said on the call with clients of a wealth advisory firm that bankers have told him they expect a cascade of bankruptcies to hit the American economy, and he wondered if the Fed needed to do more to provide support, according to a person with knowledge of the remarks…

Even as the U.S. is plunged into deepening economic gloom, it will have to raise taxes to pay for emergency efforts to rescue sectors grappling with a difficult recovery, he warned on the call.

Among his predictions: lifting the 21% corporate rate signed into law as part of 2017’s tax overhaul to about 28% or 29% next year, according to the person. Fink also said he sees tax rates for individuals going up.

Raising taxes would water down the biggest legislative achievement of Trump’s time in office, when he and a Republican-controlled Congress drove through the most significant changes to the tax code in decades.

Lower corporate rates juiced profits and showered cash on shareholders through increased dividends and stock buybacks. Now, at a time when many taxpayers are less able to bear the burden of higher taxes, the government may be forced to extract a larger share of companies’ and individuals’ income.

The spread of the coronavirus, and measures taken to mitigate it, slammed the brakes on the economy. While Trump pushes to reopen commerce and his officials predict a rapid rebound, public health experts and some economists are skeptical the crisis will soon be over.

Politicians, business leaders and economists are beginning to confront the risks of a limited federal response that might speed up the demise of smaller companies and wreck state and municipal finances that pay for schools, law enforcement and infrastructure.

That won’t be the only strain on companies. Many may have to operate with only about half their staff in the office for more than a year, according to Fink. Across white-collar industries, millions are working remotely from home. It would be hard to see a complete return without mass availability of rapid testing, he said.

There’s a risk that the U.S. outbreak will be severe enough to leave a long-lasting impact on the American psyche, undermining Americans’ willingness to take public transport or fly, according to Fink. He said he’s not aware of any of his CEO peers planning international travel this year.

Underscoring the point, this week home-sharing leader Airbnb Inc. and ride-hailing firm Uber Technologies Inc. announced plans for mass layoffs as they wrestle with falling demand and dimmed prospects for the rest of the year.

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