The world needs to be prepared for a “long slog ahead” as global markets attempt to recover from the COVID-19 pandemic, with central banks only able “to do so much,” said Randall Kroszner, former governor of the US Federal Reserve in an exclusive interview with Yahoo Finance UK.
Market expectations need to be adjusted, he added, characterising the recovery as being sharp down, then partially up followed by a “long slog” before global economic activity returns to pre-COVID-19 levels.
The virus is “going to have a long term impact on demand in certain sectors,” he said. “This isn’t going to simply go away with the creation of the vaccine. The ability to use technology in the place of physical meetings and travel is going to have a permanent impact on the travel and hospitality industries for quite some time. Until everyone has been vaccinated and the vaccines are effective, and that’s going to take a long time for people to feel comfortable about that.”
Kroszner served as a governor of the Federal Reserve System from 2006 until 2009. He chaired the committee on Supervision and Regulation of Banking Institutions and the committee on Consumer and Community Affairs, and played a key role in developing responses to the financial crisis and in undertaking new initiatives to improve consumer protection and disclosure, including rules related to home mortgages and credit cards. He is currently the deputy dean for Executive Programs and Norman R. Bobins Professor of Economics at the University of Chicago Booth School of Business.
Ahead of the next European Central Bank (ECB) October meetings, Kroszner said he also expects policy to largely remain unchanged as it relates to the post-pandemic recovery.
“They’re waiting to see how that second outbreak is going to play out, both in terms of policy and its health impact before they take their next step,” he said. “I think they are going to try to have a nudge in this direction of what their 2% goal is.”
While increasing the amount of asset purchases is an option, he said it would happen over the long-term but also warned it will eventually have a diminishing impact, similar to negative interest rates.
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“I think going a little bit more negative isn’t going to have a dramatic impact and so I think they need to do something that changes how people view the framework.”
His sentiment has been echoed by analysts.
In a research note published on Thursday, Nomura said it expects the ECB to leave its monetary policy unchanged at its October meeting, with the next policy move coming in March 2021.
At that time, it said it believes “the ECB will increase its PEPP [Pandemic Emergency Purchase Programme] envelope by an additional €400bn (£361bn, $474bn)” and just before that it expects the ECB to step up its weekly PEPP purchases into the winter in the event the eurozone economic recovery becomes impaired by more restrictive lockdown measures as COVID-19 cases spread.
Still, despite market uncertainty, Kroszner said he remains hopeful and encourages governments to do more to support their workforce, particularly those in technology-related sectors.
“[Central banks] can provide a cushion for the transition but it is going to take other policies, whether it be fiscal support policies, policies to promote greater competition and investment, that are outside central banks’ control,” he said. “They are not the only game in town. I think there is sometimes too much reliance on central banks to cure all ills and we don’t have the tools to do that.”